June 6th is Higher Education Day! As a parent and/or grandparent there is great satisfaction in helping your child or grandchild pay for college. How you pay for it is important. What are the options? Let’s review some of them!
A 529 plan is a “qualified tuition plan.” They can be in the name of the student, parent, or grandparent. We have all heard the praises of 529 plans (including that they grow income tax free). But there are things to be aware of regarding 529 plans. If it is in the name of the student or the parent, it will count against the student when they apply for student aid. The investments are limited; each state preselects the investments. Also, if your child/grandchild doesn’t need the money (enters the military, receives a full scholarship, chooses not to go to college, etc.), you will have to pay income taxes on the earnings as well as a penalty for withdrawing the funds.
It may sound a little unconventional to set up your own Roth IRA to pay your child/grandchild’s college expenses but it works. Money contributed to a Roth IRA is already taxed so it grows income tax free and there are no taxes when withdrawing it. There are advantages to funding college this way: you maintain control of your assets, the money in this account will not affect financial based scholarships or financial aid, and there are no capital gains taxes. (529 plans are similarly funded with after tax dollars.)
Invest in a Growth Fund/Growth Equities
This almost sounds too easy. By investing in a Growth Fund/Growth Equities (in your own name), you will have capital gains. However, you avoid dividends (no income tax), you maintain control of your assets, and it doesn’t affect financial based scholarships or financial aid.
Part of a good Estate Plan is deciding how to spend your money now, while you’re alive to enjoy it. It is important to evaluate the benefits and costs of paying for higher education children and grandchildren as well as funding retirement. If you’d like to discuss your Estate Plan with one of our attorneys, call our office to schedule an appointment (919-256-7000).