When the Bills Come Due
Tread mighty carefully when tapping your college savings accounts
Among all types of college savings vehicles, a parent's IRA should typically be used as a last resort. Financial planners note that while students have access to any number of loans and scholarships for college, parents have no similar options to fund their own retirement. So if you have the financial wherewithal to avoid tapping your IRA for college, leave it alone.
Keep looking. Another case against using withdrawals from an IRA to pay for school--in addition to the fact that you may have to pay taxes on the withdrawal--is that money pulled from an IRA will be considered income for the purposes of financial aid, notes Hurley. On the other hand, qualified withdrawals from a parent-owned 529 or a Coverdell do not count as income.
Finally, even if you have more than enough money saved in a combination of 529s and other accounts, don't forget to consider using low-interest loans to improve your cash-flow situation, says Karen McIntyre, a financial planner with Executive Financial Services of Spring House, Pa. "You have to think about maximizing your resources, and low-cost borrowing can be a resource for parents," she says.
That's what Dan and Jacqui Sattler are doing. The couple, who fittingly live in a town called Collegeville, Pa., have tried to keep things relatively simple when it comes to saving for college for their oldest daughter, Emily. The Sattlers started by opening an UGMA account in Emily's name when she was born. But then, a few years back, they heard about the tax advantages of investing through Pennsylvania's guaranteed tuition savings plan, which lets parents lock in a rate of return equal to tuition inflation. So they rolled Emily's UGMA into that.
Today, they've got more than enough to fund four years of undergraduate education for Emily, who is heading off to Shippensburg University in Pennsylvania. And Emily recently won a Pennsylvania Board of Governors scholarship, which essentially pays for tuition, leaving her parents to pick up the tab for room and board and miscellaneous expenses.
Yet to cover costs during Emily's first semester, the Sattlers relied on a combination of loans (including a no-interest loan offered by their daughter's school district and a low-interest Stafford student loan in Emily's name) and their own savings--rather than tapping their daughter's tuition account.
Among the reasons: Emily has two younger siblings. And Dan and Jacqui are hoping to preserve as much of Emily's tuition-savings plan as possible, since any leftover balance can be rolled over to either Melissa, 14, or Benjamin, 11.
"Hopefully," says Sattler, who works as an information technology manager, "we won't have to tap that account that much, and some of it can flow into Benjamin and Melissa." Now that's planning ahead.
Taking The Money Out
Withdrawing cash to pay for college can be as challenging as saving it. Be mindful of the effects on both financial-aid eligibility and taxes.
PLAN TYPE
529 savings plan: A tax-deferred investment account.
PROS
Money is not in student's name, helpful with financial aid.
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