TTHC12 – Saving and Investing for College

Answer: It depends, based on your tax situation and whether or not your student will qualify for need-based financial aid.Here are some investments options:

1) Money in the bank

• Not a lot of tax benefits.
• Not currently paying high interest rates.
• Will need to report as an asset for financial aid.
• Be sure to confirm social security numbers/ownership of all bank accounts….parent owned versus student owned accounts.

2) Mutual fund, stocks & bonds

• Funds may have the opportunity to grow and are accessible to use for college, however, you may have to pay taxes on the distributions.
• Since they are outside of a retirement account, they will count as an asset for financial aid.

3) ROTH IRA

• Can make contributions but there are no deduction on taxes.
• Money grows tax deferred.
• Can withdraw contribution amount and if you spend on college, you will not have to pay taxes on the contribution amount.
• May need to pay taxes on the “growth” portion of the contribution.
  Example: if you contribute $5000 to the ROTH and it grows to $7000, you can withdraw the original $5000 to spend on qualified college expenses and not have to pay taxes.
• Will not count as an asset as it is a retirement account.

4) Traditional IRA

• Can make contributions and take advantage of a deduction on taxes.
• Could take IRA funds to use on qualified expenses.
• It will increase your income if you take a withdrawal.

5) Retirement Plan through your employer (i.e. 401k, 403b)

• Contributions can help reduce income

Commonly used for college

6) 529 – No income limits.

• Advantage: This is a college plan set up by each state for college savings. Grows tax deferred. Can withdraw tax free if spent for qualified education expenses for college.
• Wisconsin offers a state tax deduction for a $3000 contribution.
• Disadvantage: Considered a parent asset for financial aid for all children accounts in the family, not just the college student.

7) Coverdell or Education IRA

• Current contribution limit $2000.
• Coverdell funds can used for K-12 education expenses.

8) UTMA/UGMA

• These accounts can be invested in stocks, bonds or mutual funds.
• Considered a student asset for financial aid purposes.
• May be beneficial to spend down the assets…must spend on the student.

QUESTION
How do I fill out the FAFSA if our taxes are not complete?
Fill out the FAFSA to meet the earliest deadlines on your student’s school list using estimates. From your taxes, the FAFSA will ask for, income for mom & dad, AGI and total tax.
Make a copy of last year’s taxes and replicate it based on year end numbers and prior year W2s. When taxes are complete, you will have the opportunity to correct the FAFSA and resubmit. Better to get the FAFSA filed on time, before all of the financial aid resources are gone!

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