|
It takes the wisdom of Solomon to decide how to divide up your dollars between your retirement savings or your kids - college funds. But it doesn't take divine wisdom to reach the right result if you follow the right rules.
Rule #1: Invest college money in your name, not your kids'.
A lot of parents like to put their child's college savings in their kid's name through Uniform Transfers to Minors Act accounts (UTMA's) or Uniform Gifts to Minors Act accounts (UGMA's). In most cases, my advice: Forget about it. Why? Three reasons immediately come to mind.
The biggest reason is that it can dash your child?s chances of receiving financial aid. Colleges count a much larger percentage of a student's assets than their parents' when calculating aid packages. Any tax savings you may have received from transferring your assets into their name could be dwarfed by higher education costs.
Second, some investments may provide a tax savings if the parent is the owner, but not the child. For example, the interest on certain U.S. savings bonds is exempt from federal income tax only if a parent is the owner and the eligibility requirements are met.
Third, UTMA's and UGMA's need to be turned over to your children between the ages of 18 and 21. However, there is no requirement that this money actually be used for college, your original intent. Your child might come up with a hundred "better" uses for that money and you?d be powerless to control the expenditures at that point.
However, having said all this, there may be times when you want to save in your child's name such as with blended families where divorce is more than a possibility, for estate tax reasons, or where a lack of self-discipline could lead you to raid the college fund cookie jar to pay for vacations or other expenses.
Rule #2: Knock on the financial aid door.
With the cost of college already so high and its continued yearly increases outstripping the general inflation rate, the "higher" in higher education could also refer to tuition costs.
The good news is you don't have to foot this bill by yourself. If you're like most families, financial aid can provide a healthy boost to your child's college funding. But you need to apply.
Scholarships are everyone's first choice since there's no obligation to repay this gift. Dig into Web sites and books devoted to this topic to make sure no stone is left unturned. The next alternative, loan or other aid packages, may be available even if you think your income is too high. Don't assume you don't qualify. Ask. Be ready to negotiate with colleges to make a deal that works for everyone. And finally, work, the four-letter word many children hate to hear, is another good source of college funding.
Rule #3: Trim discretionary spending.
Almost all of us have an area where our spending could be trimmed back. Whether it's that run to McDonald's every morning or buying more shoes than Imelda Marcos, take a look at the how much you could save by cutting back and then do it. Make a conscious effort to put to this "new source of income" to a better use by earmarking it for your kids' college education. Reduce caffeine and increase savings at the same time - that's a nice combo.
Rule #4: Know how much you need to save for college and put the rest towards retirement.
Knowledge is powerful. Figure out how much you need to save for college and put the rest of your available savings dollars in an IRA or other retirement plan. Even if the amount saved each month is small, small amounts can make a big difference over the years due to the magic of compounding.
Rule #5: Get professional advice as needed.
Do yourself a favor and get tax and financial advice on the right way for you to save before you start putting dollars away for your child's college education. Remember, every dollar that isn?t needed for your kid's college fund is money in the bank for your retirement fund.
|
