Other Ways to Save
While 529 plans and Coverdells are specifically designed for higher education planning, other strategies also exist. While not intended specifically for this purpose, these alternatives can help you pay for expenses. Talk to us before implementing any of these strategies to find out how they may affect your overall investment plan.
IRAs
You can withdraw funds from your IRA to pay qualified higher education expenses. While this may seem like a viable savings option, remember that you will be spending your retirement savings. In addition, amounts withdrawn may count as income and affect eligibility for need-based financial aid. The 10% penalty tax for withdrawals is waived when funds are used for higher education purposes, but the money may still be subject to income taxes. Typically, if you own a traditional IRA, the full amount will be taxed, while Roth IRAs allow tax-free withdrawals in certain circumstances. Discuss this issue with us to determine if your withdrawal will be subject to taxation.
Company-Sponsored Retirement Plans
If additional money is needed to pay college expenses, you may be able to borrow from your 401(k) or 403(b) plan. Typically, these loans charge a percentage point or two above the prime lending rate. Interest charged does get deposited into your retirement account, but you will lose the benefit of compounding interest. In addition, the loan must be repaid in five years and, if employment is terminated, the loan may be due immediately.
Life Insurance
While the main purpose of life insurance is to provide money to your family after your death, it can also be used to fund higher education expenses. While it is inappropriate to buy a policy for the sole purpose of college savings, the cash value of your whole, variable or universal policy can be used to pay for such expenses. Talk to us for specific guidelines before withdrawing funds, and remember that life insurance is not a college savings plan by nature. Other alternatives can better help you save for these expenses.
Put Your Child’s Future First
Your child’s education is important to you. And because of that, it’s also important to us. Raymond James financial advisors listen to your objectives and provide personalized solutions to help you reach them. By putting your investment needs first, we can help you properly plan for a bright future. The time to plan for your child’s future is today. Contact us for a no-obligation analysis of your college planning alternatives.
