Don’t just save—invest in the future.
Traditionally, college in and of itself is said to be an investment, but could saving for college be considered one as well? Many of the recent trends in college savings involve doing a lot more than simply putting money aside in low-yield savings or classic, taxable investment accounts. Find out more about some of the fresh ways people are now starting to plan for their children’s futures.
A 529 plan would fall under this heading. In such a plan, parents and students get outside help from beyond the traditional nuclear family, such as from grandparents, noncustodial parents in blended families or divorce situations, and family members who are not within the student’s household (as defined on the FAFSA federal financial aid form).
“Parents can suggest contributions to a 529 or other savings program in lieu of birthday or Christmas gifts, or offer to match any donation from outside the family,” writes Andrea Williams of U.S. News.
With multiple sources contributing, college financing doesn’t seem like such a daunting task. Even better, 529 plans are tax-advantaged—but this blessing could be seen as more of a curse come tax time.
“Parents may want to claim a tax credit, such as the American Opportunity Tax Credit or Lifetime Learning Credit, while a grandparent may want to use the same expense to justify a tax-free distribution from a 529 plan,” says David Macauley, the college planning program manager for Thrivent Financial in Austin, Texas. “The same expense cannot be used to justify more than one tax break, so communication and coordination are necessary.”
Furthermore, according to FAFSA guidelines, any college-related funds that a student receives from someone other than a custodial parent could reduce the amount of eligible financial aid by as much as 50 cents on the dollar due to the money’s counting toward the student’s untaxed income.
Roth IRAs are typically used for retirement planning, but lately parents have been using these tax-deferred funds to save for college.
“Unlike with regular IRAs, contributions to the Roth can be withdrawn tax free,” Williams says. “For parents over age 59 1/2, all distributions are tax free as long as the account has been open for at least five years.” For parents under that age, parameters are just slightly different, she explains.
Moreover, money from an IRA is not factored into the federal government’s estimation of what a family can afford to pay, or the expected family contribution, on the FAFSA. On the other hand, money in a savings or regular investment account does count against the EFC.
While the Roth IRA may seem like a good idea for those parents getting a late start on saving for college, don’t be too quick to embrace this tactic of financial planning for school. Remind yourself that the Roth IRA is supposed to be used for retirement; if you use it on schooling, that money won’t be available when the time comes for you to retire.
Many high school seniors opt to take a year off between high school and college to allow for more time to earn and save tuition money. But did you know that if the oldest child takes a gap year or two, you might get more federal aid for all the other children in the household?
“Having an older child wait before starting college may increase financial aid eligibility by increasing the number of years with multiple students in college,” Macauley says. “This is possible because the parents’ expected financial contribution—a key component of the FAFSA—gets split between multiple students during overlap years.”
None of these novel strategies for saving for college are foolproof, but what savings plan ever is? Be sure to fully research all of your options and weigh the pros and cons before deciding how to invest in your children’s futures.
For more information contact us at 703.584.3400.
529 plans are:
Are Not FDIC Insured
Are Not Bank Guaranteed
May Lose Value
Are Not Deposits
Are Not Insured by Any Federal Government Agency
Are Not a Condition to Any Banking Service or Activity
As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. The tax implications can vary significantly from state to state.
Includes copyrighted material of IMakeNews, Inc. and its suppliers. All content contained in this newsletter is for informational purposes only and should not be relied upon to make any financial, accounting, tax, legal or other related decisions. Each person must consider his or her objectives, risk tolerances and level of comfort when making financial decisions and should consult a competent professional advisor prior to making any such decisions. Any opinions expressed through the content in this newsletter are the opinions of the particular author only.