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Too Late to Save – The Bill is Due Next Week
Few families are able to save enough to meet the college bill. You can take withdrawals from a regular IRA to pay higher education expenses without having to pay the 10% penalty tax that usually applies to payouts before age 59 1/2. Income tax will still be owed on the amount of the withdrawal.
Roth IRA contributions can be withdrawn tax- and penalty-free.
You can take out a loan against your qualified retirement plan at work. When available, this is a much better alternative than outright withdrawals from retirement accounts. As you repay the money, your retirement fund is restored. You maintain the tax-deferral advantage, and the interest payments go to you. You can generally borrow 50% of your vested retirement account balance, limited to a maximum loan amount of $50,000. Many financial planners discourage this approach because the withdrawn funds are not being invested or generating the same returns as the core account.
Many families use a home equity loan to help pay college expenses. As you know, you can generally borrow up to $100,000 and write off the interest as an itemized deduction. No problem if you use the money to pay for college. This privilege is still available to those whose income is too high to qualify for the new college loan interest write-off. However, you can't deduct interest on loan amounts in excess of the value of your home net of other mortgage debt. If you choose to use this vehicle, financial aid experts suggest that the funds be assessed through a line of credit rather than a lump sum payment. The funds should not be disbursed to you until after you have completed and filed the FASFA. Otherwise, the funds will be counted as an asset with some portion allotted to the expected parent’s contribution. Please review The Education Resource Center, Understanding Financial Aid, and Maximize Your Financial Aid Possibilities for more detail.
Grandparents and other family members are generally interested in the success of your children. A number of grandparents today are in the position to write a check directly to your child's college to pay for his or her tuition without adverse gift tax consequences (room and board does not apply) and the usual $10,000 annual limit is waived under this circumstance. If not an outright gift, grandparents may agree to give you an interest-free loan. Tax rules are complicated for loans over $10,000. As long as the below-market-interest rate loan is under $100,000 and payable on demand, the arrangement will generally get acceptable tax results for all concerned. As with the case of all financial decisions, consult with your financial advisors and document the transaction so that it is clear both parties expect and intend repayment of the loan.
Of course with all financial decisions, you should consult with your financial advisors. | |
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