Tuesday, December 15, 2009


Here are some suggestions for paying for or saving for your children’s college education.

* Many grandparents want to help pay for, or pay in full, the college education of their grandchildren.

Instead of paying the tuition upfront, or giving money directly to the student(s), what they should do is have the grandchild(ren) pay for college using student loans, and then pay-off the loans once the student has graduated. This way they know that the money is actually used for education, and not squandered on wine, women, song, sex, drugs, rock and roll, or a fast car, and that a degree is actually earned.

If there is any interest charged on the student loan it can be deducted by the student (if recorded under the student’s name and Social Security number and not that of the parents), even though it is paid by the grandparents.

Be advised that in such a situation the pay-off of the loan will be treated as a gift and subject to the federal Gift Tax rules and limitations. If the grandparents pay the tuition directly to the college the payment is not subject to the Gift Tax annual exclusion limitations. But that should not be a problem if timed properly.

This is a good idea for parents as well as grandparents.

* Instead of contributing to a Section 529 plan, parents with young children, and the appropriate Adjusted Gross Income, should consider using ROTH IRAs (one for each parent) to save for college.

Because distributions from a ROTH are treated as coming out of “basis” (i.e. contributions) first, if the parents only withdraw up to the amount of their total contributions over the years to pay for college there will be no tax cost. The parents should leave the earnings on their contributions in the accounts for their retirement.

This way if their child (or children) does not attend college, or gets sufficient scholarships or other financial aid, or otherwise does not need any or all of the money that has accumulated to pay for post secondary education, there is no need to worry about tax consequences, as there would be if there was excess money left in a Section 529 account.

In either the best case (full scholarship all 4 or more years) or worst case (no education beyond high school) scenarios the parents will have a nice tax-free nest egg socked away for retirement. Even with scenarios that are “in between” there will be some tax-free accumulation for retirement or to pass on to beneficiaries.

Parents can also use a combination of Section 529 and ROTH IRA contributions to save for college.

* And one final thought. If parents do contribute to a Section 529 Plan for their future college student(s), while the child will be the “beneficiary” of the account, the “owner” of the account should be the parents. This way they can maintain control of the money.

As usual, if you have any questions about any of these suggestions you should consult your tax professional.


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