5 Ideas for Funding College Education for Your Kids as an Optometrist

September 21, 2023

At some point in their careers, a lot of optometrists find themselves paying down student loan debt, managing a mortgage, saving for their children’s education, and planning for their own retirement — all at the same time. 

It can be overwhelming. So, today we’ll cover five strategies to help you fund your children’s college education while maintaining financial stability. 

Remember, personal financial planning is just that – personal. 

These ideas are meant to provide guidance and spark your own creative thinking about what works best for your family.

Using a 529 Plan for College Funding

529 plans are a popular option for college education and funding. 

These plans are specifically designed for higher education expenses and offer several benefits for optometrists and optometric practice owners. 

While I won’t go into all the details of 529 plans in this blog post, I will provide a brief overview and highlight some key points to consider.

  1. Tax advantages: One of the main advantages of 529 plans is their tax benefits. Contributions to these plans are made with after-tax dollars, meaning you won’t receive a federal tax deduction for your contributions. However, the earnings in the account grow tax-free, and withdrawals for qualified education expenses are also tax-free. This can result in significant savings over time.
  2. Flexibility: 529 plans offer flexibility in terms of the beneficiary and the use of funds. As an optometrist or practice owner, you can open a 529 plan for yourself, your children, or even your employees. The funds can be used for a variety of qualified education expenses, including tuition, fees, books, supplies, and even room and board. This flexibility allows you to use the funds strategically to meet your specific needs.
  3. State-specific plans: Each state offers its own 529 plan, and some states even offer additional tax benefits for residents who contribute to their state’s plan. It’s important to research and compare the different plans available to find the one that best suits your needs. For example, I live in Indiana. And while Indiana’s 529 plan may not have the lowest expense ratios compared to other options like Vanguard, it’s still a viable choice considering the potential returns.

Now, let’s address the elephant in the room. Some financial experts may argue that focusing solely on expense ratios when choosing a 529 plan is crucial. 

However, I believe it’s essential to consider the bigger picture. While low expense ratios are important, they shouldn’t be the sole determining factor in your decision-making process.

Instead, I encourage you to think about the potential returns on your investment. 

Using a Roth IRA to Fund Your Kid’s College 

Using a Roth IRA to fund your kid’s college education can be a smart financial move. By strategically timing your withdrawals, you can maximize the benefits and minimize any negative impact on financial aid eligibility. Here’s how it works:

  1. Timing is Key: When using a Roth IRA for higher education purposes, it’s recommended to use the funds in the later years of your child’s education, specifically their junior and senior year in college. This is because the income used for the Free Application for Federal Student Aid (FAFSA) is based on the two years prior to the academic year. By using the Roth IRA funds during their junior and senior year, the income from those withdrawals won’t be considered in the FAFSA calculation since your child will have already graduated by the time that income would be used.
  2. Preserve Growth: The benefit of using a Roth IRA for college funding is that any growth or earnings accumulated in the account will continue to grow tax-free. When you withdraw the principal amount, which is the contributions you’ve made to the Roth IRA, the growth portion remains untouched and can continue to grow over time. This can be a significant advantage in building wealth for your child’s future.
  3. Be Mindful of Income: One important consideration when using a Roth IRA for college funding is to ensure that the withdrawals do not significantly impact your income. This is because your income can affect financial aid eligibility. However, since Roth IRA withdrawals are tax-free and not considered taxable income, they should not affect your income for financial aid purposes.

By utilizing a Roth IRA for college funding, you can take advantage of the tax benefits and preserve the growth potential of the account. It’s important to be intentional and strategic in your timing of withdrawals to optimize the financial aid process

Using an FMC to Help Kids Save for College

 A family management company (FMC) is a tax savvy way in which you can employ your kids in your practice. 

One big benefit of this is that they would have funds available to them to use for whatever expenses they would incur in the future, including college education costs. 

Here are some benefits of setting up an FMC to employ your kids in your practice:

  1. Tax Savings: By employing your child in your optometric practice through an FMC, you can take advantage of tax deductions and credits. This can help reduce your overall tax liability and free up more funds to allocate towards your child’s education expenses.
  2. Asset Protection: When your child earns income through the FMC, it is considered their asset, not yours. This means that it won’t negatively impact their eligibility for federal aid, grants, or scholarships. By strategically managing your income and assets, you can maximize your child’s chances of receiving financial assistance for their education.
  3. Wealth Building: Utilizing an FMC allows you to start your child off on the right foot when it comes to building wealth. By providing them with meaningful work in your practice and paying them a fair wage, you can instill important financial values and help them develop a strong work ethic. This early exposure to financial responsibility can set them up for long-term success.
  4. Educational Opportunities: Funding your child’s college education through an FMC can open up a world of educational opportunities for them. With the financial burden reduced, they may have more flexibility in choosing the right school or pursuing additional academic endeavors, such as graduate or professional programs.

It’s important to note that utilizing an FMC for college funding is most beneficial for optometrists who are confident they won’t qualify for federal aid or grants due to their income. If you believe you fall into this category, the FMC can be a powerful tool for optimizing your tax strategy and supporting your child’s educational journey.

Leveraging Cash Flow

The fourth option is to just use cash to fund your kids’ education — basically, setting aside a portion of your income each month specifically for college expenses.

I know what you’re thinking. “Adam, how the heck am I going to cashflow college at some point in the future?”

To be fair, this strategy works best if you are early in life and can make long-term decisions and stick with them indefinitely. 

Now, the two things that massively impact our ability to use our cash flow for big expenses like our kids’ college are: Car payments and a mortgage. 

This is why I’m a huge proponent of 15-year mortgages. I’ll explain:

  1. Debt-free education: By paying off your mortgage on a 15-year term, you can significantly reduce your overall debt burden. This means that when it comes time for your child to attend college, you won’t be saddled with the additional burden of student loans. Instead, you can focus on supporting their education without the stress of debt hanging over your heads.
  2. Financial freedom: Paying off your mortgage early not only frees up cash flow for college expenses, but it also provides you with greater financial freedom overall. With a mortgage payment out of the picture, you’ll have more flexibility to allocate your income towards other financial goals, such as retirement savings or investments. This can help you build wealth and secure your financial future.
  3. Peace of mind: Knowing that your house is paid off and your finances are in order can bring a sense of peace and security. You won’t have to worry about making mortgage payments while also trying to fund your child’s education. Instead, you can focus on enjoying the present and planning for the future, knowing that you have taken proactive steps to secure your family’s financial well-being.

If you have the long term intention, wherewithal, and knowledge to use this kind of plan, you can create a solid foundation for funding your child’s college education.

Intention, Knowledge and Clarity are Key

Overall, having intention, knowledge and a clear vision is what will help you set yourself and your children up for success. 

By the way, if you would like personalized assistance in implementing the above strategies or need help with any other financial planning needs, please feel free to book a Triage call with our team. That’s the “Book a Triage Call” button at the top of this page. 

In any case, I hope this gave you a little bit more clarity as to different ways you can use financial vehicles and strategies for your kids’ college savings.

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