When your paycheck stops in retirement, will you have enough to pay your bills, travel, and live the lifestyle you want in your golden years? Of course, you might be one of the lucky ones with a pension. Social Security may still be there. But if you want to live your retirement vision, it’s important to save and invest properly. And how you pay for your kids’ college education will impact your own retirement. Think about it: tuition, books, fees, and housing continue to rise at a faster rate than general inflation. Based on current trends, the cost of sending just two kids to a private or elite college for eight years will cost more than $360,000 if paid after taxes. This means those in the 28% tax bracket need to earn more than $500,000 to cover cash flow costs. Regardless of where you send your kids to school, the fact is, how you pay for college impacts how much you save for retirement. For every dollar you save on tuition, it means more for your personal retirement later.
There are a number of strategies you can use to improve your chances of having a better retirement and a solid education at a lower personal cost. There are over thirteen strategies for increasing aid based on need. There are at least a dozen ways to cut costs that any family can use to improve their bottom line. Ultimately, it comes down to your ability to use the IRS code to your advantage to reduce your own Expected Family Contribution (or EFC in financial aid parlance). Whether or not you plan to qualify for needs-based aid, here are some examples of cost-cutting strategies available to you.
Strategy 1: Obtain college credit through exams By taking advanced level exams or even a “challenge” exam for basic university courses, a student can complete their studies faster, which could save thousands of dollars in tuition and fees. Opportunities are available for the Advanced Placement (AP), College-Level Examination Program (CLEP), or DSST exams for 37 different courses. For more information on this, see the CollegeBoard or search for “Get College Credit”.
Strategy 2: Stay local Tuition and tuition at a public institution of higher learning is a bargain compared to elites and even crossing the border to go to a public college in another state. If you plan to cross the border or leave, consider asking your child to establish residency in that state. Find out about residency requirements in advance by contacting the admissions office.
Strategy 3: Get the credit you deserve from the IRS Use the Hope Education Credit, renamed “American Opportunity Tax Credit”. This amount was recently increased to $2,500 (from $1,200) and now applies to all four years of college, not just the first two. In addition, forty percent of the credit is now refundable. Another boost comes in the form of the Lifetime Learning Credit which is available for a family member and allows you to take up to 40% credit on education expenses up to $10,000. . Income limits apply, so be sure to consult a qualified tax professional or visit the IRS website.
Strategy 4: Employ your child If you own a business, work as an independent contractor, or own rental real estate, consider hiring your child to work for you. Perhaps your child can provide administrative support or help with marketing or real estate related tasks. By hiring and paying a child, you reduce your own taxable income through a business expense deduction and provide income for your child. Additionally, the child can use the earnings to open a Roth IRA, a tax-advantaged retirement account that is not assessed as an asset for financial aid purposes. And if needed, a child can withdraw a portion of the proceeds to pay for eligible education expenses. Certain time limits and restrictions apply.
Strategy 5: Establish a Section 127 Education Support Plan As a business owner, you can establish a Section 127 employer-paid tuition benefit program for your employees. This plan allows the business owner to pay up to $5,250 per year to employees (including employed children) as a qualifying tax-deductible expense. This can be used for both undergraduate and graduate study programs. Assuming Junior was going to work in the family business over the summer and throughout the year, Junior can earn a salary (business deductible expense) which he can use for his own support and the Roth contribution IRA (which may be eligible to pay educational expenses) and earn a tuition benefit (another deductible business expense). If you were to give the money to the child anyway, you might as well structure it to be tax deductible. Consider this: there are over 110 other different strategies to consider. All the more reason to have a coordinated plan in place by speaking with a professional advisor who can help assess these options with you. Food for Thought:
- Encourage your tween to open a Roth IRA with income from their paper route or other jobs.
- Consider hiring your child to work in your business or to help you with tasks related to your investment property.
- Use a CollegeSure CD issued by an FDIC-insured bank to accumulate savings
- Consider using a fixed income annuity to hold some of the money for college to avoid the potential loss of principal that can occur with a 529 plan invested in mutual funds.
- Look for private and merit-based scholarships (for more information on some of these options, check out the Fast Web, the CollegBoard and Scholarship Experts, or the Scholarship Coach on the web.