Business Development Officer, T.D. McNeil Insurance Services, Fresno, California
Most students start college with little financial preparation. Sometimes parents who have particular objectives will start saving money for their children’s college education, however, that is not common. The result is that college is now one of the top three lifetime expenses for families that send their children to college.
There have been several plans advanced to help families accumulate money to send their children to college. You are probably aware of them. The greatest weakness of these plans is that the money is set aside for an individual student. While there may be an opportunity to name another student there isn’t a clean way to recover the money without additional taxes and penalties.
A Roth IRA has some income restrictions that might make it unavailable. However, it is a simple plan. Contributions to a Roth IRA are made with after-tax money. There isn’t an age limit on who can participate. Even if you already have an employer sponsored you can participate in a Roth IRA. If there is a non-working spouse an IRA can be started on his or her account. As I mentioned before there are some income restrictions based upon gross income level.
Once the account has been in force for five years the funds can be withdrawn. These funds can be received free of income tax after age 59 and a half. You can pass the Roth IRA tax free to heirs if you have had the account for more than five years.
If you use the account to fund college expenses you can withdraw the funds without paying the 10% early distribution penalty tax. The money that you withdraw from the Roth IRA is free of income tax as long as it is less than the amount that you contributed.
Because of the age restrictions a Roth IRA would be particularly attractive to a grandparent trying to accumulate money for a grandchild.
A Roth IRA is best started as early as possible. Most people are in a lower tax bracket in their early years and that amplifies the effectiveness of the Roth IRA. Establishing a systematic deposit plan can be quite effective in accumulating money.
If the student receives money from a parent or from their own Roth IRA it must be noted on the Free Application for Federal Student Aid (FAFSA.) The receipt of money from a Roth IRA can reduce the student’s eligibility for other forms of student aid. Incidentally, money coming from grandparents is not monitored.
An alternative to a Roth IRA might be permanent life insurance. It has many of the same tax characteristics and has the unique feature of plan completion if the person insured dies. Permanent life insurance is also treated differently by the FAFSA. You could check with a college finance officer about that aspect.
The advantage of using either a Roth IRA or permanent life insurance is that it gives your flexibility. If the child decides that they want to run away and join the circus instead of attending your alma mater, you still have the money and in the case of life insurance, the policy might serve other purposes.
.JPG){kind=avatar}
There have been several plans advanced to help families accumulate money to send their children to college. You are probably aware of them. The greatest weakness of these plans is that the money is set aside for an individual student. While there may be an opportunity to name another student there isn’t a clean way to recover the money without additional taxes and penalties.
A Roth IRA has some income restrictions that might make it unavailable. However, it is a simple plan. Contributions to a Roth IRA are made with after-tax money. There isn’t an age limit on who can participate. Even if you already have an employer sponsored you can participate in a Roth IRA. If there is a non-working spouse an IRA can be started on his or her account. As I mentioned before there are some income restrictions based upon gross income level.
Once the account has been in force for five years the funds can be withdrawn. These funds can be received free of income tax after age 59 and a half. You can pass the Roth IRA tax free to heirs if you have had the account for more than five years.
If you use the account to fund college expenses you can withdraw the funds without paying the 10% early distribution penalty tax. The money that you withdraw from the Roth IRA is free of income tax as long as it is less than the amount that you contributed.
Because of the age restrictions a Roth IRA would be particularly attractive to a grandparent trying to accumulate money for a grandchild.
A Roth IRA is best started as early as possible. Most people are in a lower tax bracket in their early years and that amplifies the effectiveness of the Roth IRA. Establishing a systematic deposit plan can be quite effective in accumulating money.
If the student receives money from a parent or from their own Roth IRA it must be noted on the Free Application for Federal Student Aid (FAFSA.) The receipt of money from a Roth IRA can reduce the student’s eligibility for other forms of student aid. Incidentally, money coming from grandparents is not monitored.
An alternative to a Roth IRA might be permanent life insurance. It has many of the same tax characteristics and has the unique feature of plan completion if the person insured dies. Permanent life insurance is also treated differently by the FAFSA. You could check with a college finance officer about that aspect.
The advantage of using either a Roth IRA or permanent life insurance is that it gives your flexibility. If the child decides that they want to run away and join the circus instead of attending your alma mater, you still have the money and in the case of life insurance, the policy might serve other purposes.