Wednesday, April 27, 2011

Use IRAs for college ... but only as a last resort

Spring is in the air. Many families are preparing to send a child or grandchild off to college. But the average cost for tuition and fees can easily run $35,000 or more. And the cost is rising faster than medical care and as much as three times consumer prices. Therefore, students borrow because they see no other way. The problem is Americans now owe close to $1 trillion on their student loans — more than on their credit cards! When they leave college, the majority of student loan borrowers struggle to repay their debts. So it’s no wonder parents and grandparents often raid their IRAs instead of letting the kids take out student loans. But that helping hand can be a huge blunder. You would be correct in saying that money you take from a traditional IRA to pay college expenses won’t get hit with the under 59½, 10% penalty. You’ll still owe income tax though. See IRS Publication 590, page 53 for the details. However, there is a pitfall … you can’t put the money back. That means the only way to replace the funds is with your ongoing contributions. Plus every dollar you take out of your IRA is one less dollar you have building up tax-deferred to fund your retirement. So by all means, only use your IRAs to help with college expenses as a last resort. And if your loved one is years away from heading off to college, there are other alternatives, such as 529 savings plans that are meant for college savings. 529 plans offer a lot of flexibility in the amount of money you put away, it builds up tax-deferred and you maintain control over the account. Many of the major mutual fund companies offer good information on their 529 plans. Or you could check out what the IRS has to say, just click here. Learn the ins and outs of the loans and saving programs available to help college-bound kids. You’ll stand a much better chance of having they finish their education with as little debt as possible, without jeopardizing your retirement nest egg. Best wishes, George

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