Dealing With College Costs

Diane Glover

Jul 14, 2015

Here’s a little-known secret for parents planning to send their children to college: Some of the tax-saving moves you make now could hurt your student’s chances for getting financial aidlater.

lores_file_folder_college_fundIt’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 20 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Contributions to retirement accounts are usually tax-deductible and the earnings are tax deferred until withdrawn.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.

Copyright 2015

About The Author

As the Manager of Practice Growth, Diane focuses on the market awareness and growth of Kirsch CPA Group…

Read More


Sign Up for Email Updates


Accounting & Financial News

IRS Targets Partnership Tax-Reduction Tactic

The IRS recently announced the launch of a new multistage regulatory initiative intended to close what it calls a "major…

Why Strategic Planning and Succession Planning Should Always Go Together

Some small to midsize businesses engage in regular strategic planning, others let it fall by the wayside and adhere to…

How a Budget Can Contribute to Your Success

One reason many people disdain the budgeting process is that they associate budgets with restraint — that is, not spending…