Helping a child or grandchild with college expenses can be a worthwhile investment. Certified financial planner Ross Marino discusses a popular plan to start saving.
Now or later?
That is the first question to answer when you want to help a child or grandchild pay for college.
Next question is whether you want to keep control of the money. To start now, you can place money in an account, which can be used for college. A popular choice is a 529 plan.
Go to www.cfnc.org for information about the North Carolina 529 plan. For state residents, you may be eligible for a state tax credit when making contributions. A 529 isn’t for everyone.
The biggest advantage of a 529 plan is the opportunity to receive tax-free withdrawals. If the money is used for qualified college expenses, you may withdraw the earnings tax-free. However, if you don’t use the money for college, there may be tax and penalties due.
Here is how it works. If you withdraw the money and not use it for college, you will pay tax on the earnings, and pay a 10% penalty. Keep in mind, you did not pay tax on the earnings while the money was growing. If you had invested the money elsewhere, you probably would have paid tax on the earnings. So I don’t look at the tax as a negative. But the 10% penalty is certainly a negative. Investors need to consider the risks and expenses associated with 529 plans. They are not appropriate for everyone.
You may also open a savings account and start saving money now. If you do not need to have control of the money, you could gift the money to your grandchild, or open a custodial account for them. There are limits to how much you can gift without generating taxes, but that may not be the biggest risk. When a student applies for financial aid, all of his or her assets are considered –meaning, any money gifted to your grandchild is considered available for college, and that could limit the amount of financial aid they receive.
You may be better off opening an account yourself, and setting aside the money you want to gift.
Or, when your grandchild goes to college, you can pay the college directly.