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Day 11 - Saving for College
By JLP | February 23, 2006
Saving for college is one of the biggest challenges for families. However, there are things to do to make it less challenging:
1. Start saving early. You could even start saving for your kid’s college BEFORE you have kids. I know that’s what my sister-in-law and her husband are doing.
2. Figure out how much you are going to need. I have written a lot about how to make this calculation:
College Funding Math
College Funding Math - Part 2
College Funding Math - Part 3
College Funding Math - Part 4
Meeting Future Goals
3. Figure out how you’re going to get there. There are lots of choices for saving for college. Unfortunately, all the choices make planning very confusing. The two most popular ways to save for college are the 529 Plan and the Education IRA. Both are pretty good choices but each have their own pros and cons. I plan to address these accounts in the future. A detailed explanation would be too long for this post.
4. Look into UPromise and other cash-back savings plans. Although they don’t help a lot, they will help you save some towards college.
5. Finally, let Uncle Sam help you pay for college. I wrote a post on this a couple of months ago. Any little bit helps.
There’s a lot to know when it comes to saving for college. I’ve given you some of the basics to think about. I will address the specific plans in the near future. In the meantime, you might want to read what other bloggers have to say about saving for college:
FreeMoneyFinance:
4 Ways to Save Big on College Costs
College Financial Aid Can Save You Lots
Tax Savvy Ways to Save for an Education
New MBAs Finding Education Pays Off Big Time
Four Basic Ways to Save for College
Chief Family Officer:
FatPitchFinancials:
Coverdell Education Savings Accounts
FiveCentNickel:
Using Retirement Funds to Pay for College
Permanent Tax Exemption for 529 College Savings Plans?
CanadianFinancialStuff:
The RESP program in Canada and it’s power
How much is a Canadian University going to cost?
PoliticalCalculations:
Topics: College Funding |
February 23rd, 2006 at 7:31 am
One of the things that I am starting in April is to hire my oldest daughter (who turns 8 in April). It will actually be my wife who hires her, but my wife is starting a sole-proprietorship, and her first client is my LLC. Since she works in a family business, and is under 18, she does not require and FICA or FUTA, which makes her dirt cheap as an employee. Beyond that, any income up to $5150 (the standard deduction) is tax free! We are planning on paying her about $7000 for a years work (or about $11/hr for 12 hours a week). She will be funding a Roth IRA and a Coverdell ESA.
I got to thinking about the financial aid implications of this (for others, because I plan on being well enough off that my daughter does not qualify for financial aid). Coverdell ESA distributions are counted towards income, and and weigh against financial aid eligibility. However, what about a Roth IRA? The answer is no. The value of Roth IRAs are not counted toward financial aid eligibility. Plus, you can take out your contributions from the Roth IRA. These can be used to pay for anything, including education. In addition (and this needs to be verified), I believe you can withdrawal earnings from a Roth IRA, without penalty, if they are used for educational expenses. The only caveat to the Roth IRA is that the contributions have to be made from earned income, so you child would have to be working.
I do not plan on my daughter using her Roth IRA to fund college, but it is an option. Hopefully, my daughter won’t touch the contributions at all, but it would be okay if she used them as a down payment on a home when she gets done with school.
February 23rd, 2006 at 8:16 am
In addition (and this needs to be verified), I believe you can withdrawal earnings from a Roth IRA, without penalty, if they are used for educational expenses.
If the Roth IRA owner is under 59 1/2, they would have to pay taxes on the earnings that were withdrawn. If the earnings are withdrawn to pay for qualified education expenses, there would be no 10% penalty on the earnings.
February 23rd, 2006 at 12:09 pm
I’m going to be annoying and selfish and say that college savings should come only after saving for one’s own retirement, particularly if you’re having kids later in life (ie, after 35, so the kids are in college as you’re nearing retirement). Your kids are far better able to deal with student loans than you are at getting someone else to pay for your retirement. By “come after”, I mean that annual goals should be set up for retirement savings, and if you can’t meet those, you should defer saving for college - not try to “do for others first than yourself”. This sounds great, selfless, etc - but it does neither you nor your kids any good.
Not that student loans are a good thing, but they’re better than an unfunded “retirement”.
April 7th, 2006 at 4:10 am
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