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? Sure, you may be one of the lucky ones with a pension. Social Security may still exist. But if you want to live your retirement vision, then it’s important to save and invest properly. And how you pay for your children’s college will affect your own retirement. Think about it: College tuition, books, fees, and housing continue to rise at a faster rate than inflation overall. Based on current trends, the cost of sending just two children to a private or elite college for a total of eight years will cost more than $360,000 if paid after taxes. This means that those in the 28 percent tax bracket must earn more than $500,000 to cover cash flow costs. Regardless of where you send your kids to school, the bottom line is this: How you pay for college affects how much you save for retirement. For every dollar you save on college costs means more for your future personal retirement.
There are a number of strategies you can use to improve your chances for a better retirement and a solid education at a lower personal cost. There are over thirteen strategies for increasing need-based help. There are at least a dozen ways to cut costs that 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 lower your own expected family contribution (or EFC in financial aid parlance). Whether or not you expect to qualify for need-based aid, here are some examples of cost-cutting strategies available to you.
Strategy 1: Earn college credit through exams By taking Advanced Placement exams or even a “challenge” exam for core college courses, a student can finish school faster and potentially save thousands in tuition and fees. Opportunities are available for Advanced Placement (AP), College Level Examination Program (CLEP), or DSST exams for 37 different courses. For more information on these, check out CollegeBoard or search for “Getting College Credit.”
Strategy 2: stay local In-state tuition and fees at a public higher education institution are a bargain compared to the elites and even crossing the border to go to another state’s public university. If you are considering crossing the border or moving away, consider having your child establish residence in that state. Find out what the residency requirements are in advance by contacting the admissions office.
Strategy 3: Get the credit you deserve from the IRS Use the Hope Education Credit, renamed the “American Opportunity Tax Credit.” This was recently increased to $2,500 (from $1,200) and now applies to all four years of college, not just the first two. Also, forty percent of the credit is now refundable. Another helping hand comes in the form of the Lifetime Learning Credit that is available to a family member and allows them to take up to a 40% credit on educational 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 real estate for rent, consider hiring your child to work for you. Perhaps your child can provide administrative support or help with tasks related to marketing or real estate. By hiring and paying a child, you will reduce your own personal taxable income through a business expense deduction and provide income for your child. In addition, the child can use the earnings to open a Roth IRA, a tax-advantaged retirement account that is not evaluated as an asset for financial aid purposes. And if necessary, a child can withdraw a portion of the income to pay for qualified educational expenses. There are certain time limits and restrictions that apply.
Strategy 5: Establish a Section 127 Educational Assistance 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 qualified tax-deductible expense. This can be used for both undergraduate and postgraduate study programs. Assuming Junior was going to work in the family business over 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 Roth IRA contribution (which may be eligible to pay expenses). education) and earn a tuition benefit (another deductible business expense). If he was going to give the child the money anyway, he can also structure it to be tax deductible. Consider this: there are over 110 different strategies for you to consider. All the more reason to have a coordinated plan by speaking with a professional advisor who can help evaluate these options with you. Food for thought:
- Encourage your tween to open a Roth IRA with earnings from their paper route or other jobs.
- Consider hiring your son to work in your business or help with chores related to your investment property.
- Use a CollegeSure CD issued by an FDIC-insured bank to build savings
- Consider using a fixed income annuity to set aside some money for college to avoid the potential principal loss 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, CollegBoard, and Scholarship Experts or Scholarship Coach on the web.