When your paycheck stops at 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 even still exist. But if you want to live your retirement vision, it’s important to save and invest properly. And the way you pay for college education for your children will impact your own retirement. Think about it: tuition, books, fees, and housing continue to rise at a faster rate than inflation in general. Based on current trends, the cost of sending just two kids to private or elite college for a total of eight years will cost over $ 360,000 if paid after tax. This means that those in the 28% tax bracket must earn more than $ 500,000 in order to cover the costs associated with the cash flow. No matter where you send your kids to school, the bottom line is: how you pay for college affects how much you save for retirement. Every dollar you save on education costs means more for your personal retirement in the future.
There are a number of strategies you can use to improve your chances of a better retirement and a solid education at a lower personal cost. There are over thirteen strategies for increasing need-based aid. There are at least a dozen cost-cutting ways any family can use to improve their bottom line. Ultimately, it depends on how well you know how 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 expect need-based help, here are some examples of cost reduction strategies available to you.
Strategy 1: Earn college credit through exams By passing advanced level exams or even a “challenge” exam for basic college courses, a student can complete their education faster and 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, check out CollegeBoard or search for “Getting College Credit.”
Strategy 2: stay local Tuition and fees at a public higher education institution are a steal compared to elites and even crossing the border to attend public college in another state. If you are planning to cross the border or move away, consider asking your child to establish residence in that state. Find out in advance about residency requirements by contacting the admissions office.
Strategy 3: Get the Credit You Deserve from the IRS Use Hope Education Credit, renamed “American Opportunity Tax Credit”. This amount was recently increased to $ 2,500 (from $ 1,200) and now applies to the four years of college, not just the first two. In addition, forty percent of the credit is now repayable. Another helping hand 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 property, consider hiring your child to work for you. Perhaps your child can provide administrative support or help with marketing or real estate tasks. By hiring and paying a child, you will reduce your personal 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 necessary, a child can withdraw part of the proceeds to pay for eligible educational expenses. Certain time limits and restrictions apply.
Strategy 5: Establish an education assistance plan under section 127 As a business owner, you can establish an employer-paid education benefit program under Section 127 for your employees. This plan allows the business owner to pay up to $ 5,250 per year to employees (including child employees) as an eligible tax-deductible expense. This can be used for undergraduate and graduate degree programs. Assuming that Junior was going to work in the family business during the summer and throughout the year, Junior can earn a salary (deductible expense for the business) that he can use for his own support and the Roth contribution. IRA (which may be eligible to pay tuition fees) and earn a tuition allowance (another deductible business expense). If you still had to give the money to the child, you can also structure it to be tax deductible. Consider this: there are over 110 other different strategies to consider. All the more reason to put in place a coordinated plan by talking to a professional advisor who can help you evaluate these options with you. Food for thought:
- Encourage your preteen to open a Roth IRA with the income from their paper journey or other jobs.
- Consider hiring your child to work in your business or help with household chores 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 capital 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 Fast Web, the CollegBoard and Scholarship Experts or the Scholarship Coach on the Web.