It's because of the way the financial aid
system treats different assets. Retirement plans and
IRAs don't count for college aid purposes. You're not
expected to break into these accounts to pay for
tuition.
The college aid formula requires 35
percent of the assets in your
child's name to be
used for college costs. But the government-mandated
formula only expects about 5.6 percent of the money in
the parent's name to be spent. So you're better off
keeping accounts in your own name, especially during the
last two years of high school, which is generally when
you'll be asked to start providing tax returns.
Don't assume you're not eligible for assistance. With
the high cost of college today, many schools now have
programs available to relatively well-off families if
they meet certain qualifications. For example, your
child might be able to get a "merit award" based on high
standardized test scores and superior grades.
The best strategy: If you expect to
apply for financial aid, don't hold back placing money
in your own retirement plan in order to put away savings
in a college account in your child's name.
Contributions to retirement accounts are usually
tax-deductible and the earnings are tax deferred until
withdrawn. On top of these tax breaks, your family may
also become eligible for more financial aid.
Remember that you can usually tap retirement accounts
for college money. Many 401(k) plans allow loans to be
taken. And thanks to a tax law that went into effect in
1998, you can generally withdraw a limited amount from
your IRAs penalty-free to pay higher education costs for
yourself, your children and
grandchildren.
