Sending your kids off to college can be one of the most daunting transitions for parents. Beyond making sure that they are prepared for all that college life will throw at them, there is the whole task of having to foot the bill. The first strategy is that you try to nurture the inner prodigy within them to shine. Tennis lessons, private violin teacher, and tutors galore only end up helping 0.3% of students who are able to genius themselves into a full ride scholarship according to CBS News. While we are hoping that your baby has it within them, this isn’t a strategy to rely upon.
They might not get a full ride scholarship, but there are thousands of scholarships through a variety of organizations that your child can apply for. These very from merit based scholarships that require a certain GPA to be upheld to maintain and some you can only apply for if you meet specific criteria of the giving organization.
There are also Federal grants which is applied though Federal Student Aid (FAFSA) and then your degree of financial need is assessed. These you could be liable to pay back in some cases if your child withdraws from school, but are mostly free grants for those in financial necessity.
And I am sure that everyone has been told the day their new baby comes into this world to open a 529 account to start saving for their college fund. 529’s are tax advantaged accounts that you can make tax free disbursements from on qualified expenses for the beneficiary of the account. These accounts are not only great for your college fund, but also for your taxes with a $2,000 tax deduction in Massachusetts (here’s also looking at you grandparents, aunt and uncles looking for deductions). These accounts are invested in actively managed funds, index funds or a combo that are usually set to the year your child is anticipated to enroll in college, taking on less risk as orientation day nears.
You can spend your 529 fund on any qualified expenses such as tuition, books, fees, room and board, (even rent in some cases) and other expenses. If your child received some scholarships or grants that covers the first year or two of school, you do not have to make any withdrawals from the account on a scheduled basis, so keep letting that interest accumulate until the funds are needed. The caveat for 529’s is that there is an aggregate contribution limit of $500,000 for each beneficiary in Massachusetts and if one individual contributions above $16,000 in a year that must be reported on IRS form 709 and are counted against the lifetime estate and gift tax exemption of $12.6 million for this year. And if your child doesn’t go to college or need to make withdrawals you will face a 10% penalty in addition to a tax penalty.
You can always make these contributions into a regular non-qualified brokerage account and then are only responsible for the tax liability of the capital gains on the long term held positions. There is no limit on contributions for this type of account, no penalties for any withdrawals, and this money can be spent on any type of expense and if your child doesn’t go to college… hello vacation fund!
Now this one is a bit more alternative and requires some finesse, but what is better than someone else paying for your child’s college? Nothing! If you purchase an investment property when each child is born, ensuring that it is in an area where the price for the home is what your anticipated college costs are you can pay for it through equity. Buy a house. Rent it out. Make sure that you are at least breaking even on all costs (bonus points if you are also cash flowing) and wait 18 years until they begin school. You have built up 18 years of equity in a home and can borrow against that to pay for school. And who is paying it back? Your renters! Or you can choose to wash your hands and sell the property and take advantage of the asset appreciation as well.
Own a business? Did you know that you can hire your child starting at age 7 through 22 to work for your company (doing legitimate work) and pay them up to $12,000 tax free? They can do anything from filing, to cleaning, to stuffing envelopes. This can also reduce your taxable personal income by $12,000 per child per year! You can also reimburse your child that is 21 years or older $5,250 per year for tuition and books as a business expense with IRS Section 127 plan.
At the end of the day there are dozens of ways to put together the right strategy for paying for your children’s college expenses. The right strategy is going to depend on their age, how much you are planning to contribute, what type of school they might attend, and most importantly how financially sound the parents are in terms of meeting their goals. As always, consult a tax and legal professional in addition to your financial advisor before you implement any of these strategies. Questions? Book your free consultation with me at www.arieldangelo.com.
Disclosure: The information provided is not written or intended as specific tax or legal advice. Packerland Brokerage Services, its subsidiaries, employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.
