Financing Your Child"s College Education
Coming Up With the Money See Page One: How to Prepare for the $100,000 Price Tag
When trying to come up with the money for your child's college education, a combination of financing methods will probably work best. Be sure to take advantage of any tax-deductible methods that you're eligible for. Some of the available financing methods include:
If you'll be 59 1/2 when your child is in college, a Roth IRA may be an attractive investment vehicle, because withdrawals will be tax free (assuming you've had the account for at least five years).
Even if you'll be younger than 59 1/2 when your child is in college, there are benefits to Roth IRAs. You can still withdraw your contributions without paying taxes or penalties, and earnings can be used to pay for college expenses without a penalty, although you will have to pay taxes.
The proceeds from Education IRAs aren't taxed, but your contributions are limited. While this might help pay for some college expenses if you start when your child is very young, it will never cover the cost of a four-year degree.
The Hope Scholarship Credit allows a deduction of 100 percent of the first $1,000 of qualified tuition and fees and 50 percent of the next $1,000, up to a maximum of $1,500 per year. The credit is phased out at certain income levels. Like the Education IRA, this credit by itself will not go very far towards financing a college education.
State college savings (529) plans, on the other hand, give you the opportunity to earn stock-market returns on college savings you don't need for several years.
Contributions grow tax-deferred until the money is used to pay for college, then earnings are taxed at the student's tax rate, another attractive benefit. If the money isn't used for college, however, there can be a penalty of 10% to 15% of your accumulated earnings or 1% of the account balance.
Pre-paid tuition plans, another type of 529 plan, are attractive when tuition rates are rising around 10% a year, but they limit your growth to the rate of public-college tuition increases in your state, so when tuition increases level off at 4 to 5%, these plans are no longer very attractive vehicles for financing a college education.
Life insurance policies are sometimes used to finance a college education, but some experts say this is not a good method for most people. Although variable life insurance policies include tax-deferred investment options, there are significant costs for the life insurance, sales commissions, and management fees, reducing your earnings. This option may only be viable for those in the 28% or higher tax bracket who will probably not qualify for financial aid.
If you start early, know your alternatives, develop a plan, and invest wisely and regularly, it IS possible to pay for your child's college education.
See Page One: How to Prepare for the $100,000 Price Tag
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When trying to come up with the money for your child's college education, a combination of financing methods will probably work best. Be sure to take advantage of any tax-deductible methods that you're eligible for. Some of the available financing methods include:
If you'll be 59 1/2 when your child is in college, a Roth IRA may be an attractive investment vehicle, because withdrawals will be tax free (assuming you've had the account for at least five years).
Even if you'll be younger than 59 1/2 when your child is in college, there are benefits to Roth IRAs. You can still withdraw your contributions without paying taxes or penalties, and earnings can be used to pay for college expenses without a penalty, although you will have to pay taxes.
The proceeds from Education IRAs aren't taxed, but your contributions are limited. While this might help pay for some college expenses if you start when your child is very young, it will never cover the cost of a four-year degree.
The Hope Scholarship Credit allows a deduction of 100 percent of the first $1,000 of qualified tuition and fees and 50 percent of the next $1,000, up to a maximum of $1,500 per year. The credit is phased out at certain income levels. Like the Education IRA, this credit by itself will not go very far towards financing a college education.
State college savings (529) plans, on the other hand, give you the opportunity to earn stock-market returns on college savings you don't need for several years.
Contributions grow tax-deferred until the money is used to pay for college, then earnings are taxed at the student's tax rate, another attractive benefit. If the money isn't used for college, however, there can be a penalty of 10% to 15% of your accumulated earnings or 1% of the account balance.
Pre-paid tuition plans, another type of 529 plan, are attractive when tuition rates are rising around 10% a year, but they limit your growth to the rate of public-college tuition increases in your state, so when tuition increases level off at 4 to 5%, these plans are no longer very attractive vehicles for financing a college education.
Life insurance policies are sometimes used to finance a college education, but some experts say this is not a good method for most people. Although variable life insurance policies include tax-deferred investment options, there are significant costs for the life insurance, sales commissions, and management fees, reducing your earnings. This option may only be viable for those in the 28% or higher tax bracket who will probably not qualify for financial aid.
If you start early, know your alternatives, develop a plan, and invest wisely and regularly, it IS possible to pay for your child's college education.
See Page One: How to Prepare for the $100,000 Price Tag
More Money Articles
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