How To Pay College Expenses
Coming up with enough cash to pay for your child's college education may be a challenge, even for parents with substantial income and assets. If your net worth is largely invested in a family business, for example, withdrawing $15,000 or so eight times over a fouryear period may simply not be possible. Likewise, periodically liquidating stock or bond positions may be a costly tax move that forecloses on future growth. Additionally, your current income may be largely committed for debt payments and family expenses.
However, there are many other college-expense strategies that you may find useful:
Give Income-Generating Assets to Your Student
When you give income-generating assets to your child, he or she can use the income, or liquidate the assets as needed, to pay school expenses. This strategy can have definite tax advantages. With a student age 14 or over, whom you claim as your dependent, the student's basic standard deduction makes the first $700 of investment income tax free (or, up to $250 of investment income, plus earned income, up to a combined total of $4,300). Additional income is taxed at the child's rate, not yours, and your child's rate is most likely much lower than your own.
Federal gift taxes won't be a problem if you limit your annual gifts to your child to $10,000 ($20,000, if you and your spouse split the gift). If your gift consists of long-term, appreciated assets, such as low-basis stock, and your child sells the assets to obtain cash for school expenses, the gain will be taxed at only 10%-if the child's rate is otherwise 15%instead of the 20% you would pay if you sold the assets yourself.
Draw on Your IRA
Your IRA is another practical source of college cash. You can now use your tax-deferred IRA money to pay for your child's qualified higher education expenses without owing the 10% penalty tax on early withdrawals. The amount you can withdraw is not limited, and most education expenses are eligible tuition, fees, books, room and board, etc. Although penalty taxes will not apply, it is important to note that regular income taxes will be due on any withdrawals you make from a tax-deferred IRA.
Let Grandparents Help
If grandparents are in a position to assist your student, they can withdraw from their IRAs for education expenses under the same conditions as you can. In addition, grandparents are able to pay an unlimited amount of tuition directly to your child's college or university without any federal gift-tax impact.
Borrow from Your 401(k) or Home Equity
If you would rather borrow than liquidate assets to pay for college costs, consider drawing on your 401(k) account, assuming your plan permits loans to participants. But note that the total amount your plan can allow you to borrow is generally limited to the lesser of $50,000 or half of your vested account balance. You will be required to repay any 401(k) loan within five years, or immediately, if you change employers. Using a home equity loan is much more flexible than a 401(k) loan. Your property's value and present mortgage balance largely determine the amount you can borrow. The loan's term can extend for many years, and all the interest you pay may be tax deductible.
Borrow or Withdraw from Your Life Insurance Policy
Another college funding option you may wish to explore is to access the cash value of an existing life insurance policy by taking a withdrawal or policy loan. Many life insurance policies such as whole life, universal life and variable universal life offer the opportunity to build cash values and this build-up generally enjoys an indefinite deferral from taxation while the policy remains in force. This value can be accessed on a favorable tax basis to pay college expenses.
Policy loans generally are not treated as taxable distributions. And withdrawals, if permitted, are typically taxable to the extent funds received exceed the total premium payments remitted. It is important to remember, however, that any withdrawals or loans taken from a life insurance policy will reduce the death benefit available to your heirs. Loans taken from a policy may be repaid in part, or in full, at any point in time while the policy remains in force.
If you own a business or a have a complex financial situation, it will probably be beneficial to consult your accountant and/or financial advisor before you finalize your choice for funding college expenses. A #1 Insurance Quotes Life Disability Insurance Representative, working in conjunction with your other professional advisors, can be instrumental in helping you plan for the best financial future for your family. Please contact us if you have any questions or are in need of planning assistance.