401(k)s Should Not Be Used to Pay for College!

You work hard each month to save money in your 401(k). Seeing how much your money has grown over time gives you peace of mind about your retirement. Until you get the first bill for your kid's college. It can be hard to find the money to pay for college, so you might be tempted to use your 401(k) to help pay for your child's education. But is it a good plan? Actually, no. This is why.

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401(k)s Should Not Be Used to Pay for College!

As the cost of college goes up, it's natural for parents to worry about how they'll pay for tuition and fees without taking money from their retirement accounts. A recent study found that 68% of parents would think about using their retirement savings to help pay for their children's college. At the same time, 41% of Americans don't think they'll have enough money saved to retire. This puts families in a tough spot because they have to pay for day-to-day expenses while also trying to save money for the future.

Did you know that ALL of the money in your retirement plan is taxed?

Since your 401k/403b/IRA is fully taxed at ordinary income tax rates, raising taxes to help boomers could drastically cut the amount of money you have to live on when you need it the most. Also, if you borrow money from your 401k to pay for college expenses and then switch jobs, you should know that the loan must be paid back right away, usually within 60 days of the time you leave. And if you don't have the cash to pay off the 401k loan, the loan balance may be considered a taxable distribution. This means that if you are under the age of 591/2, you would owe regular income tax plus a 10% penalty.

No one knows if the government will raise taxes. But as a parent whose kids want to go to college, you need to look at the bigger picture. You need to save for retirement BEFORE you can save for college.

Please give Vincere Wealth a call before you ever think about taking money from your retirement account to pay for your kids' college. They can show you numerous ways to help you pay for college without taking money out of your retirement account.

There are ways to pay for your child's college education that don't involve taking money from your retirement savings or even getting a loan. 

Here, we'll talk about some of the most common ones so you can decide what's best for your family.

529 Plans

A 529 plan is a type of investment account that is specifically created for saving for college expenses and offers tax advantages to residents of specified states. Two distinct 529 plans exist. Although there are more than 250 private colleges that offer a plan through the Private College 529 Plan, prepaid tuition plans allow the account holder to buy units or credits at certain colleges or universities (often in-state or public schools) for tuition only. 

An education savings plan, the second type of 529 plan, offers a little more flexibility by enabling the borrower to set aside funds for tuition, fees, and room and board. These two different types of plans operate quite similarly to a Roth IRA Plan. Although there are no caps on how much can be contributed to the plans, there are annual and lifetime gift tax limits that apply to the amount contributed. Because some plans may have fees and expenses that cut into your returns, it is essential that you have a solid awareness of those costs.

Your current balance can shift according to market conditions depending on the investment strategies you select from the available alternatives. You have the ability to make changes to your investment options; however, you can only do so twice a year or when there is a beneficiary change.

An advisor at Vincere Wealth can help you open a 529 Plan today! Click here to speak with one asap.

Roth IRA & Traditional IRA

It may surprise you to learn that you can utilize an IRA withdrawal to pay for college, but only if you adhere to a few rules.

Whether you take money out of a standard or Roth IRA counts when it comes to IRA distributions for schooling. Because a Roth IRA is established using after-tax monies as opposed to a traditional IRA, you can withdraw the full amount of contributions from your Roth IRA without incurring any penalties or charges (but not earnings). You cannot use the money after graduation to pay off loans; instead, you must provide the IRS confirmation that the student you are funding is currently enrolled in an appropriate institution in order to avoid the regular 10% early withdrawal penalty that is associated with a traditional IRA. It's also crucial to remember that the withdrawal cannot be for more than the qualifying costs you're claiming.

The amount that can be contributed to a Roth IRA each year is limited. If you are under the age of 50 in 2022, the maximum amount you can contribute is $6,000. If you are 50 or older, the maximum amount you can contribute is $7,000. Because the contribution limitations are reduced gradually for households with high incomes, this option is not available to everyone. On their FAFSA (Free Application for Federal Student Aid), students are not required to submit the balance of their individual retirement account (IRA), but the amount of any untaxed withdrawals will be reported.

An advisor at Vincere's team can help you open a 529 Plan today! Click here to speak with one asap.

Home Equity Options

If you own a property, you might also be able to use the equity in it to pay for your child's college tuition. There are conventional home equity student loans available, which are dependable due to their fixed interest rates and consistent monthly payments. They do, however, require you to take out another loan on your house, which, depending on your particular circumstance, might not be the best option. A home equity line of credit (HELOC), which offers flexibility in terms of access to funds and how frequently you can borrow, is another option you might want to think about. Your monthly payments will be unpredictable due to the variable interest rate, and the lender has the right to block the HELOC at any time if the value of your property or your credit score declines

Without the stress of debt, a home equity investment can provide you with the money you need to pay for your child's college expenses in full or in part. You receive cash in exchange for a portion of the future worth of your house and have ten years to use it anyway you see fit; there are no interest or monthly payments to be concerned about.

Parent PLUS Loans

These loans are federal student loans that are granted directly to parents. Their purpose is to supplement financial help received from the school, the state, or the federal government. In order to qualify for one of these loans, you need to be the biological or adoptive parent of an undergraduate student who is reliant on your financial support and who is enrolled for at least half of the academic year. You should be able to qualify for coverage of the total cost of attendance provided that you meet some minimum credit criteria and the student meets the requirements set forth by the financial aid office. The maximum amount that you are eligible to borrow is determined by the educational institution.

How Teenagers Can Contribute to College Savings?

Teenagers can become more comfortable learning about money and feel secure in their own financial decisions by having early and frequent conversations about it with their parents. Even when you're under financial pressure, try to present truthful, balanced information. In addition to lowering debt, helping your child save for college can give them financial independence, teach them important budgeting skills, and give them a deeper understanding of what college is like. Saving enough money for a few books or some décor for their dorm or apartment is realistic, but saving enough for a full year's worth of tuition may be more than kids can handle. Teenagers can contribute to their college expenses in a number of ways, some of which don't need them to work or save extra money. Here are some examples.

1. Apply for Scholarships

Scholarships are excellent strategies to lower the amount of uninsured costs that families must pay. It's never too early to begin thinking about different scholarships and how to become eligible for them. Your child's high school coursework and extracurricular activities can be guided by this information. For instance, some scholarships are awarded based on academic performance, while others are awarded based on talent or volunteerism.

Don’t have time to search for scholarships? We got you! Check out our Scholarship Hero Subscription where we send you 55+ scholarships each month. Straight to your inbox - no more searching.

2. Dual Enrollment

For students who want to begin earning college credits early but aren't prepared for the rigor of an AP course, dual enrollment may be an option. Many institutions collaborate with nearby high schools so that students can receive credit for both high school and college courses. Some universities provide grants or scholarships to dual-enrolled students, and course costs may be lower. The college where a student was dual enrolled does not need them to complete their undergraduate studies there. Most large colleges with comparable accreditation accept credits from two- and four-year colleges or universities.

There are ways to make college AFFORDABLE. We put together a short course, showing you all the ways in which your child CAN attend college without busting your pockets.

3. Take Advanced Placement Courses

Students who enroll in Advanced Placement (AP) classes during high school can get ready for college work and receive college credit based on their AP exam results. The number of credits awarded for passing an AP exam varies by school and exam. A 3 on the AP Chemistry exam, for instance, can be worth 4 credits at one school and 8 credits at another. Teenagers who earn college credits can take fewer classes, possibly graduate earlier, and spend less on tuition overall.

Learn How to Save THOUSANDS on College Like This

With our Master College Funding Course, we cover everything you need to know on how to pay for college the RIGHT WAY and how to stay far away from ANY unnecessary college costs throughout your college journey.

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