Pay for College and Still Retire!

Wednesday, March 09, 2011

Dan Forbes, GoLocalProv Financial Expert

A newborn baby is a time for great joy and celebration. On the flip side, it also starts an 18 year countdown until baby leaves for what could be a very expensive college. For those with children about to hit college age, it’s time to calculate your Expected Family Contribution. For those with newborns, hopefully you handed out cheap cigars so you can apply the difference to junior’s education funds. There are many ways to pay for education, but the following are the building blocks where you should always look to start:

529 Plan

These tax advantaged plans remain the go-to funding vehicle due to tax-deferred growth and a decreasing fee structure. For Rhode Island, the CollegeBoundfund continues to make improvements as the 529 of choice. An especially helpful feature of the Rhode Island 529 - depending on your tax bracket, they’ll match a certain amount of your yearly contributions. However, you’re not confined to only using your state’s plan. If you prefer to use no-load companies like Fidelity or Vanguard, they are available in other states.

Roth IRA

One of my favorite strategies includes the use of Roth IRAs. A Roth allows the owner to withdraw contributions for “Qualified Education Expense”. Given the contribution limitations, you may not be able to fully fund college with the Roth, but it’s great as a supplement or fall-back option. Also, whatever you don’t use for education remains in your account for retirement purposes.

Home Equity

I know what you’re saying – “What home equity??” While many have seen their home value drop below their outstanding loan amount, there are still those with plenty of equity. As long as rates remain low and we still get a home mortgage interest deduction (which could be on the chopping block), this remains a useful borrowing strategy.

Cash Value Life Insurance

One of the benefits to a permanent life insurance is the option to borrow against the policy’s cash value tax free. If you do borrow from your policy, make sure you get an illustration from the insurance company projecting the affect it will have down the road. Make sure the outstanding loan doesn’t prevent the policy from doing what it’s supposed to do – pay out when the insured passes away.

The sooner you start prepping for that fateful tuition bill, the better, but it’s never too late to start. The key to education funding is to not jeopardize your retirement in the process.

Dan Forbes is a regular contributor on business financial issues. His office is in Providence, RI. He leads the firm Forbes Financial Planning and can be reached at [email protected]