As college tuition continues to skyrocket, it’s becoming more important than ever to know how the various savings plans work. Here is a link to a handy reference that outlines the latest rules on the most popular college savings programs (529 plans, Coverdell savings accounts and the Education Savings Bond program) and how to use them to save money on your children’s education. In addition to details of each of the plans, the reference also contains information on Student loan availability and limits, Education tax credits and Student loan interest and tuition and fees deduction.
Whenever we have a discussion with a client about 529 plans and saving for their child’s college costs, we are almost always asked the same couple of questions.
1. What If My Child Doesn’t Go to College?
You have a couple of options if your child does not go to college. Another family member can use the funds for education. That can include another child, yourself, or even nieces and nephews. There is no time limit to use the funds, so you can also keep the money in the 529 plan and use it to finance your grandchildren’s education. Having the money compound tax free for 30+ years can generate a substantial amount of money. If you decide to take the money out of the account and not use it for education, you will have to pay tax and a 10% penalty on the earnings in the account.
2. What If My Child Receives a Scholarship?
You can withdraw money from a 529 up to the amount of the tax-free scholarship without paying the 10% penalty. You still have to pay income taxes on earnings, but contributions can always be withdrawn tax and penalty free. You still may be able to find some qualified expenses that you could use the 529 money for and avoid some of those taxes. In addition to tuition, you can use the money for tuition, room, board, books and mandatory fees there.
3. Should I Prioritize Saving for Retirement Or My Child’s Education?
Our advice, almost always, is to secure your retirement first. You or your child can borrow to pay for college, but you cannot take out a loan to finance your retirement.