How to Keep Saving for College from Derailing Your Retirement
Most experts recommend that savers set aside money for their own retirement before saving for the college education of their children. Financial aid is widely available for college students but not for cash-strapped retirees. Here are some tips to help you do both:
Make use of retirement savings plans
Retirement funds in employer-sponsored savings plans and Individual Retirement Accounts (IRAs) are generally not considered among your assets available for college spending, so they won't limit your child's eligibility for financial aid.
Use tax-free savings plans
State-sponsored savings plans, called 529 plans after a provision in the IRS Code, have become increasingly popular since being introduced about a decade ago. Investments grow tax-free for qualified higher education expenses such as tuition, fees, and room and board. Contribution limits vary by state, and in some states your contribution may be tax-deductible. Also bear in mind that withdrawals for non-approved uses may trigger a 10 percent penalty.
Another option is a Coverdell Education Savings Account, which lets you put aside up to $2,000 each year and make tax-free withdrawals for education expenses. While 529 plans are limited to college expenses, Coverdell funds can also be used for primary and secondary school costs.
Get the grandparents involved
Grandparents can make contributions to 529 plans and Coverdell Education Savings Accounts. They can also make tuition payments without triggering a gift tax, as long as the payment is made directly to the school.
Don't put college savings in a child's name
It may seem natural to simply open a savings account in a child's name and make regular family contributions, but that can limit the child's ability to obtain college financial aid. Most college aid formulas require students to spend a significant share of their own assets before they can qualify for aid. If the assets are in the parents' names, the expected contribution is much lower.
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