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As parents of high school children, financial freedom becomes even more vital. 

It’s a time when expenses increase, college looms on the horizon, and the need for a secure financial future for the family becomes paramount.

Smart investment strategies can provide the means to ensure stability and growth, offering peace of mind and the ability to support your children’s dreams and aspirations. 

By carefully selecting and managing investments, parents can create a solid financial foundation that supports both current needs and future goals.

Investing in Real Estate

Investing in real estate is a tried-and-true method for building wealth and achieving financial security. It provides numerous benefits such as passive income, potential property appreciation, and tax advantages. 

For parents of high school children, real estate investments can be a powerful tool to bolster their financial portfolio and prepare for upcoming expenses like college tuition.

Buy-and-Hold Strategy

The buy and hold strategy involves purchasing properties and holding them for an extended period, allowing for steady rental income and appreciation in value. 

Here’s how this strategy can benefit parents:

  • Generating passive income: Rental income can provide a consistent cash flow, helping to cover educational expenses and other family needs. For example, purchasing a duplex and renting out one side while living in the other can offset mortgage costs, freeing up money for college savings.
  • Appreciation: Over time, properties generally increase in value, offering a significant return on investment that can support long-term goals. A property bought in a growing neighborhood could significantly appreciate, providing capital that can be used for college tuition or other major expenses.
  • Tax benefits: Real estate investments come with various tax advantages, such as deductions on mortgage interest, property taxes, and depreciation, which can help in managing overall financial health. Using a tax advisor to navigate these deductions can optimize your tax returns, maximizing your investment benefits.

Real Estate Investment Trusts (REITs)

For parents looking to invest in real estate without the demands of property management, Real Estate Investment Trusts (REITs) offer a practical alternative. 

REITs are companies that own, operate, or finance income-producing real estate. Investing in REITs allows parents to:

  • Diversify portfolio: REITs provide access to a diversified portfolio of real estate assets, reducing investment risk. For example, REITs like Vanguard Real Estate ETF offer exposure to various property types, from residential to commercial.
  • Liquidity: Unlike direct property investments, REITs are traded on major stock exchanges, offering greater liquidity. This means you can easily buy and sell REIT shares as needed, which is beneficial when planning for near-term expenses like college fees.
  • Dividend income: REITs are required to distribute at least 90% of their taxable income to shareholders, providing a reliable source of passive income that can aid in funding education or other significant expenses. An example is Realty Income Corporation, known for its consistent monthly dividend payouts.

Fix-and-Flip Strategy

The fix-and-flip strategy involves purchasing properties, renovating them, and selling them for a profit. 

While this approach can be lucrative, it requires careful planning and execution. For parents considering this strategy:

  • Conduct thorough research: Identify properties with potential for improvement in neighborhoods with strong resale value. For instance, using tools like Zillow or Redfin to find undervalued homes in up-and-coming areas can help identify good investment opportunities.
  • Budget wisely: Ensure renovation costs and timeframes are realistic to avoid financial strain. Accurate budgeting is paramount for maintaining financial stability while undertaking such projects. Using renovation budgeting software like Homezada can help manage costs effectively.
  • Leverage expertise: Working with experienced contractors and real estate agents can enhance the success of fix and flip projects, reducing the risk and increasing profitability. Hiring a reliable contractor with a proven track record ensures quality work and adherence to budgets and timelines.

529 College Savings Plans

A 529 College Savings Plan is a powerful tool for parents looking to save for their children’s higher education costs

These plans offer significant tax advantages and flexible investment options, making them an ideal choice for building a college fund. 

Understanding the various strategies and benefits associated with 529 plans can help parents maximize their savings and ensure they are well-prepared for future educational expenses.

Age-Based Investment Strategies

529 plans often offer age-based investment options, which automatically adjust the asset allocation as your child approaches college age. 

This strategy is designed to maximize growth potential during the early years and reduce risk as the time to college draws nearer.

  • Early years (newborn to elementary school): During the early years, it is beneficial to have a higher allocation in stocks (about 80% to 100%) to take advantage of growth opportunities. As your child is still many years away from college, this aggressive approach can yield higher returns despite the higher risk associated with stocks​​.
  • Middle school years: As your child enters middle school, the investment strategy should start shifting towards more conservative assets. A balanced approach, such as 60% bonds and 40% stocks, helps in securing the gains made during the earlier years while still allowing for some growth​​.
  • High school years: In high school, which is of special interest to us, it’s very important to minimize risk. A conservative mix of 70% to 80% in bonds and 20% to 30% in stocks is recommended. This helps protect your investment from market volatility as you near the time when you will need to use these funds for college expenses​​.

Tax Benefits and Rollover Options

One of the primary advantages of 529 plans is the tax-free growth and tax-free withdrawals for qualified education expenses. Starting in 2024, unused 529 funds can be rolled over into a Roth IRA for the beneficiary, providing more flexibility if the funds are not needed for education. 

This rollover option allows up to $35,000 to be moved into a Roth IRA without penalties, provided the 529 account has been open for at least 15 years​​.

Impact on Financial Aid

While 529 plans are considered in financial aid calculations, they generally have a minimal impact when owned by the parents. 

Only up to 5.64% of the account’s value is considered in the Expected Family Contribution (EFC) for financial aid purposes. In contrast, if the student owns the account, 20% of its value can be counted. 

It’s usually more advantageous for the parent to own the 529 account to maximize financial aid eligibility​​.

Selecting the Right 529 Plan

Choosing the right 529 plan involves considering various factors, such as state tax benefits, fees, and investment options. 

Many states offer tax deductions or credits for contributions to their 529 plans, making it beneficial to invest in your home state’s plan if these benefits are available. 

Some plans have lower fees, which can significantly impact the growth of your savings over time​ ​.

When selecting a plan, it’s also important to look at the investment options and whether they align with your risk tolerance and financial goals. 

Age-based portfolios are ideal for those who prefer a “set it and forget it” approach, while static portfolios may appeal to more hands-on investors​.

Key Takeaway

By integrating a 529 College Savings Plan with strategic real estate investments, parents can create a robust financial plan that addresses both immediate and future educational needs for their children. 

Seeking professional financial advice and regularly reviewing investment portfolios ensures optimal growth and adaptability to changing financial landscapes.

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