Paying for your child’s education can be expensive, and four years in college can cost a pretty penny, especially if your child decides to go to an Ivy League School. You would be shock at the total cost of tuition and fees, books, living expenses, and other miscellaneous expenses. It is recommended that you start saving as early as possible, and when you do start saving, it is better to assume that you child will go to an Ivy League University. It is better to have excess funds than it is to come up short.
This article will discuss four ways to invest and save for your children’s college education. These strategies include parents 401k withdrawal, parents ROTH IRA qualified distribution, 529, and ESA.
1. Parents 401k Withdrawal
A 401k plan is usually a plan for your retirement savings. Employer sponsored 401k plans will usually have provisions for taking out loans from your plan. You can usually borrow up to half the amount on your 401k plan or a maximum of $50,000, whichever is smaller. While it is a significant amount, it won’t even pay for a year at Harvard or a similar private university. The good news is that it won’t affect your child’s chances of receiving financial aid. While the money is technically yours, you do have to pay interests rate on your 401kloan. Yes, they will be returned to you in the form of retirement disbursements, but it can be added burden while you are paying back the loan. Withdrawing early would also affect the returns on your retirement account. You should also note that if you should lose your job, that amount will be due in 60 days.
2. Parents ROTH IRA Qualified Distribution
The Roth IRA is a plan that offers tax benefits as you save for your retirement. A Roth IRA differs from a traditional IRA in a way that contributions are not tax deductible. However, your distributions can be tax free. Using your ROTH IRA can pay for qualified higher education costs such as tuition, room and board, up to graduate school. It cannot pay for education covered by scholarships or sponsorship from your employer. An advantage of using a ROTH IRA qualified distribution to pay for college is that you don’t have to pay the 10% premature distribution tax if you are younger than 59 years old. It is also free from federal taxation.
Similar to a 401k withdrawal, it won’t affect your child’s ability to qualify for state financial aid. However using it to pay for college can affect your retirement savings. It will also affect your child’s chances of getting school-based financial assistance. Ivy League schools often have more options in financial assistance from corporate donors and generous alumni.
3. 529 Plan
The 529 is plan that has a single purpose which is to save for college. Normally parents or other adults are the principals of the plan while the child is the recipient of the plan. 529 plans are not standard because each state has its own 529 plan. The best option is to buy you own state’s plan. The 529 has great tax benefits if used for education purposes. Contributions are in after tax dollars and the money in the plan essentially grown tax free. Withdrawals for education expenses are tax free. However, if they were used for another purpose, you will get penalties. Since the state manages these funds, you might have limited investment options. For people who know how to invest, it might be better to invest the money themselves.
4. Coverdell Educational Savings Account (ESA)
The ESA is also one of the popular ways to fund your child’s college education. One of the advantages of the ESA is that it can be used to fund elementary and secondary education. It’s not just limited for college. You also have a wider array of investment choices. The earnings can also be tax free. Corporations can also contribute to an ESA which is a plus if your company will give you money for your child’s education. An ESA can also be done in conjunction with a 529 plan. However, not everybody can be eligible for an ESA. The parents’ combined annual income must be less than 220k. Contributions are also limited to $2000 annually, which may not be enough for four years at an Ivy League University. Contributions can no longer me made once the child turns 18, and the money must be utilized before your child reaches 30.
Which method are you using (or did you use) to save for your child’s college education?
{ 2 comments… read them below or add one }
Under no circumstances would I recommend a 401k or IRA withdraw to pay for your chiild’s college. If you have to do that, your child should be paying their own way. However, we do use a 529 plan. The 529 and ESA’s are great ways to pay for school – while getting a tax benefit. You can also use plain old mutual funds.
We currently are putting money in a 529 and have Roth IRA’s. I want our daughter to be able to do whatever she wants with her life, however, unless she is planning on being the President or surgeon general, I would hope she’d choose a state or less expensive school. I was accepted to some pretty expensive schools, but decided to take a scholarship to a state school, and I’ve never regretted it. No one has ever asked me where I went to undergrad either.