Published June 2005
Tips
for preparing
for children’s college cost
If
you have a college-bound senior in your house, you know that the end of
this school year means the beginning of a new adventure.
However, while college
can be exciting, it’s also expensive. If you haven’t saved as much as
you would have liked, don’t despair — even at this late date, you can
take some steps to help pay those college bills.
Here are a few ideas
to consider:
- Don’t panic
— You don’t have to pay the full year’s tuition, room and board
up front; you likely will be billed in installments that may correspond
to the school’s quarter or semester system. This payment system doesn’t
lessen your overall costs, of course, but it does give you a bit of
time to come up with additional funding sources. For example, if you
have a bond or CD coming due in the middle of the college calendar,
you can use the proceeds to pay for school.
- Liquidate
assets in a timely manner — If you’ve earmarked certain investments
for college, try not to liquidate them until it’s absolutely time to
write out the check. The longer you can keep your investments in a position
to grow, the better off you’ll be.
- Look at your
Roth IRA — If you have a Roth IRA, you can withdraw contributions,
tax- and penalty-free, to help pay for your child’s education. Certain
conditions apply to penalty-free withdrawals, so you should talk to
your tax adviser for more information. And keep in mind, if you start
withdrawing earnings, you’ll have to pay taxes on them unless you meet
certain conditions.
If
you have more time
If you still have a few years before your children head off to school,
you may want to take advantage of some of the more popular college-savings
plans. Here are two to consider:
- Section 529
plans — When you set up a Section 529 savings plan, you put money
in specific investments, which are managed by the plan administrator.
Your plan contribution limits are high, and your withdrawals are free
from federal income taxes, as long as the money is used for qualified
college or graduate school expenses. Withdrawals for expenses other
than qualified education expenditures may be subject to federal, state
and penalty taxes. (Section 529 tax benefits are only effective through
2010, unless extended by Congress. Also, a Section 529 plan could reduce
your child’s or grandchild’s ability to qualify for financial aid. Because
tax issues for 529 plans can be complicated, please consult your tax
adviser.)
- Coverdell
Education Savings Account — Depending on your income level, you
can contribute up to $2,000 annually to a Coverdell Education Savings
Account (ESA). Your Coverdell earnings and withdrawals will be tax-free,
provided you use the money for qualified education expenses. (Any non-education
related withdrawals from a Coverdell ESA may be subject to a 10 percent
penalty.) You can fund your Coverdell ESA with virtually any investment
you choose — stocks, bonds, certificates of deposit, etc. And you can
contribute to a Coverdell account in the same year that you put money
into a Section 529 plan.
Consider
all options
Putting together a good college-funding plan — either at the last minute
or years in advance — can test your resources and ingenuity. But by diligently
exploring all the options and applying some discipline, it’s a test we
all should be able to “pass.”
Eric Cumley is a Certified
Financial Planner and investment representative with Edward Jones in south
Everett. He can be reached at 425-353-2322.
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