Hi All, I've been doing some research lately on what the best way to save for my child's education. I've found several alternatives online including 529 and college savings plans. However, my thoughts are these plans will completely eliminate or reduce the chances of my child getting financial aid or subsidized loans.
I've been asking around (colleagues, not experts by any means) and I've gotten varied advice including opening an some sort of insurance account to opening a Roth IRA (I believe my child have to be working to open that). I've even had someone who had told me to put all my money into a large house and pull out equity when my child goes to college. None of these colleagues really had any rationale behind their suggestions.
I'm thinking more around the area of opening a trust for my child. Any ideas from the fatwallet community? I've also posed the question to my accountant, but he is on vacation this month. I will post his suggestions as well if there is interest in this thread.
Dealspecialist
Message edited by: dealspecialist on 2009-08-14 09:29:37 CDT
Several others suggest Roth IRA which you can withdraw principal with no penalty. Also, retirement accounts aren't included in EFC. If you open a Roth for your child they have to have income.
BlueEyesAustinTexas says Home equity doesn't figure into EFC although some private colleges use it. That's another way to store value.
We have cash value life insurance for the kids as this is not calculated as part of your assets on the FAFSA form: FAFSA FORM.
On Page5: As of today, what is your parents’ total current balance of cash, savings and checking accounts? (Q91) Investments include real estate (do not include the family home), trust funds, UGMA and UTMA accounts, money market funds, mutual funds, certificates of deposit, stocks, stock options, bonds, other securities, Coverdell savings accounts, 529 college savings plans, the refund value of 529 prepaid tuition plans, installment and land sale contracts (including mortgages held), commodities, etc. For more information about reporting educational savings plans call 1-800-4-FED-AID. Investment value means the current balance or market value of these investments as of today. Investment debt means only those debts that are related to the investments. • Do not include the value of life insurance, retirement plans (401[k] plans, pension funds, annuities, noneducation IRAs, Keogh plans, etc.) or cash, savings and checking accounts already reported in questions 41 and 91.
Page 7 has student info... with the same guidelines as the parents to not include life insurance values.
We have a VUL, you can use index ULs if you don't want the market risk. The benefit of this is you can dump as much as you want into your account depending on how much coverage you have. You don't have to be worried about govt limitations like on a 529. Your contributions are not tax free (unless you have a business and want to get creative), grows tax deferred and possible to have tax free distributions in the form of a loan from yourself. If you don't use it for education, you can use it for something else or just leave it. We plan on having our kids pay for the policy themselves when they start working. My advisor says remember, life insurance is life insurance... it is not an "investment" in the eyes of the govt... yet.
Read This Guide on how EFC is calculated. It is fairly long and involved, but it will tell you what is included in the calculation. No guarantee that the EFC will remain calculated that same in the future however. In general to shelter cash from the calculation, pay off your mortgage on your primary residence or put $ in retirement funds.
I think that Roth IRA's seem to be the way to go if you can somehow meet the limited window where you could put $5k per year into the thing and not worry about retirement funding. Even assuming a paltry 3% return, you'd have $120k by the time Bobby started college and not a penny goes on the FAFSA.
This would only work for a limited number of people, but it seems to be a viable options.
Edited to add: In 2010 there are no income limitations on Roth IRA rollovers. So a high income individual could put $5k into a non-deductible IRA then roll it over to a Roth IRA the next day. A married couple could conceivably put away $240k for college for 1 kid, then if the money isn't spent just let it ride for retirement.
This would be much preferable to the 529's where you have to pay taxes on unused withdrawals.
Message edited by: BigTR on 2009-08-14 12:23:37 CDT
BigTR said:I think that Roth IRA's seem to be the way to go if you can somehow meet the limited window where you could put $5k per year into the thing and not worry about retirement funding. Even assuming a paltry 3% return, you'd have $120k by the time Bobby started college and not a penny goes on the FAFSA.
This would only work for a limited number of people, but it seems to be a viable options.
Yeah. Set up a Roth for your kids. Have them do yard work, and pay them $5,000 for their work over the year. Have them file taxes. Etc., etc., and then withdraw the principal.
darkmeridian said:Yeah. Set up a Roth for your kids. Have them do yard work, and pay them $5,000 for their work over the year. Have them file taxes. Etc., etc., and then withdraw the principal.
That's pretty illegal. You'd be in deep tax trouble if caught.
1. You can withdraw contributions at any time without any penalty. 2. ROTH balances are not included in assets used to determine EFC.
I butchered my original post, but I also wanted to say that there is no early withdrawal penalty on the earnings if used to pay for college education for you or your children. You would pay normal income taxes, but the beauty is as follows: The first three years you use principle. The fourth year you tap into the earnings, taxable income goes up, but then it doesn't matter because the kid will be out of school.
BigTR said:darkmeridian said:Yeah. Set up a Roth for your kids. Have them do yard work, and pay them $5,000 for their work over the year. Have them file taxes. Etc., etc., and then withdraw the principal.
That's pretty illegal. You'd be in deep tax trouble if caught. darkmeridian did say to have them file taxes. If you pay them for work, and they properly file the taxes, then I don't think it's illegal at all.
It's still not a good idea, however. Either the kid would have to pay 12.4% self-employment tax, or you'd have to pay household employer taxes (which winds up costing the two of you the same amount) and the kid would likely owe income tax too since you can claim him as a dependent. I would expect that the taxes would make the whole deal a losing proposition.
ThePessimist said:BigTR said:darkmeridian said:Yeah. Set up a Roth for your kids. Have them do yard work, and pay them $5,000 for their work over the year. Have them file taxes. Etc., etc., and then withdraw the principal.
That's pretty illegal. You'd be in deep tax trouble if caught. darkmeridian did say to have them file taxes. If you pay them for work, and they properly file the taxes, then I don't think it's illegal at all.
It's still not a good idea, however. Either the kid would have to pay 12.4% self-employment tax, or you'd have to pay household employer taxes (which winds up costing the two of you the same amount) and the kid would likely owe income tax too since you can claim him as a dependent. I would expect that the taxes would make the whole deal a losing proposition.
If you have a business, then it is completely viable. Most people don't have a business.
BigTR said:If you have a business, then it is completely viable. Most people don't have a business. darkmeridian had suggested paying the kid for yard work. Sure, if you can deduct the kid's income as a business expense, the economics come out very differently. It can work out especially nicely if you're a sole proprietor, in which case there are some nice special rules for employment taxes for your kids.
the op could not have opened this topic at a more relevant time. we just had our first newborn this year and i've been racking my brains to identify a sound strategy for his college education. i know some friends have suggested a 529, some say they will pay out of their own ROTH IRA's and some have not done anything...
in our case, both the wife and I max out our 401k's and our ROTH IRA's... not sure what we should do for the kid's education though.....but one thing is certain, not doing anything is not an option. maybe we can amass enough in our own ROTH to pay his college costs? in this way, if for whatever reason, he does not go to college, then no harm done, the money is still sitting in our ROTH for our enjoyment? just thinking out loud....
I-Bonds....529 plans aren't the only way to save for college and reap tax advantages. In fact, there's another way to save for college that involves a U.S. government-backed investment: I Savings Bonds.
I Series savings bonds are unique savings bonds. They are issued at face value and pay and interest rate plus added interest to cover the rate of inflation. So these bonds always beat inflation and are backed by the U.S. government. Even better, the IRS offers tax incentives for I Bonds (and series EE bonds). You won't owe federal income taxes on your interest earnings if you use the money to pay for college. Another advantage of I Bonds over 529 plans as you don't have to name the beneficiary. You could use it to pay for your own education or your kid's education.
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