SAVING FOR COLLEGE
Plan for Taxes and
Financial Aid
Here's a
little-known secret for parents planning to send their children to
college in the future: Some of the tax-saving moves you make now
could hurt your student's chances for getting financial aid later.
It's
because of the way the financial aid system treats different assets.
Retirement plans and IRAs don't count for college aid purposes. You're
not expected to break into these accounts to pay for tuition.
Another key point:
The college aid
formula requires 35 percent of the assets in your
child's
name to be used for college costs. But the government-mandated formula
only expects about 5.6 percent of the money in the parent's name to be
spent. So you're better off keeping accounts in your own name,
especially during the last two years of high school, which is generally
when you'll be asked to start providing tax returns.
Don't
assume you're not eligible for assistance. With the high cost of
college today, many schools now have programs available to relatively
well-off families if they meet certain qualifications. For example,
your child might be able to get a "merit award" based on high
standardized test scores and superior grades.
The
best strategy: If you
expect to apply for financial aid, don't hold back placing money in
your own retirement plan in order to put away savings in a college
account in your child's name.
Contributions to
retirement accounts are usually tax-deductible and the earnings are tax
deferred until withdrawn. On top of these tax breaks, your family may
also become eligible for more financial aid.
Remember that you
can usually tap retirement accounts for college money. Many 401(k)
plans allow loans to be taken. And thanks to a tax law that went into
effect in 1998, you can generally withdraw a limited amount from your
IRAs penalty-free to pay higher education costs for yourself, your
children and grandchildren.
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