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Heading off to college is an exciting time for your child, but covering education expenses can be pretty painful. With the proper financial planning, you could be whistling your child’s college fight song all the way to the bank!
With Americans marrying later in life and waiting to have children, parents may face making tuition payments while simultaneously trying to save for retirement. This problem is best addressed by starting your college savings plan EARLY! Here are a few options to consider:
Scholarships, Grants, and Aid. Financial aid can include loans, scholarships, grants, and work-study programs. Even if your student isn’t in the top level of their class, opportunities may be available for financial aid. A student can be awarded grants or scholarships based on financial need, academic standing, extra-curricular activities, even civic involvement. Always fill out the financial aid application, even if you believe your income is too high to receive aid. 529s. These college savings accounts are available in every state.
529s allow you to contribute to an investment account in the child’s name andthen make tax-free withdrawals for qualified educational expenses. Plans and investment options vary widely, so consult with your financial professional for more information. There may also be potential state income tax or other benefits to offer that should be considered.
IRA Withdrawals. You can make penalty-free withdrawals from an existing IRA account for qualified educational costs. However, there are contribution and withdrawal limits, and not everyone can qualify for an IRA. Withdrawals also reduce the assets growing tax-deferred in the IRA and could seriously impact your retirement goals.
Coverdell Accounts. If grandparents wish to contribute to an account, you may want to consider a Coverdell Savings Account. A Coverdell allows anyone with a modified adjusted gross income of less than $110,000 a year (single) or $220,000 joint (married, filing jointly) to make yearly contributions of up to $2,000 for the benefit of a minor. Once the student turns 18, they have until their 30th birthday to withdraw the money for educational use.
The variety of options and plans available for college planning can seem overwhelming, and these are just a few ideas. Ready to talk through your options? Schedule some time with our office to discuss how to balance your child’s education and your retirement.
DISCLOSURE: A 529 plan is a college savings plan that allows individuals to save for college on a tax-advantaged basis. Every state offers at least one 529 plan. Before buying a 529 plan, you should inquire about the particular plan and its fees and expenses. You should also consider that certain states offer tax benefits and fee savings to in-state residents. Whether a state tax deduction and/or application fee savings are available depends on your state of residence. For tax advice, consult your tax professional. Non-qualifying distribution earnings are taxable and subject to a 10% tax penalty.