Ten College Funding “Shortcuts” That You May Not Have Heard

The average American family wants to support their children in attending college, but few have a concrete strategy for doing so. While your family’s strategy will be unique to your goals, resources, and circumstances, there are some lesser known facts that could prove useful in the construction of your plan. 

  1. Despite what most people think, you can save in a 529 Plan before having children. Simply open the account with yourself as the initial beneficiary and, upon the birth of your first child, you can swap them in without penalty.
  2. Not all 529 Plans are created equally. You have two big questions to ask. Does the 529 Plan offered by my state of residence offer an income tax deduction for contributions? What fees are associated with administering the plan and participating in the investment choices offered?
  3. Once a 529 Plan is created, the balance or beneficiary of the account can be swapped to a broad array of immediate family members without penalty or tax consequence.
  4. Anyone can contribute to your child’s 529 plan, including: you, your child, grandparents, relatives, friends, etc. While it may feel a bit impersonal, you shouldn’t be afraid to suggest a 529 plan contribution in lieu of a physical gift to your child – especially in those early birthday years.
  5. Should you move from one state to another and find that your new state of residence offers an advantageous income tax deduction for contributions to their 529 Plan, you can roll existing 529 Plan balances into the new state’s corresponding plan without penalty (the only caveat being that you are limited to one switch per 12-month period).
  6. If your child receives a scholarship from his or her school of choice, the full amount of the scholarship may be withdrawn from the 529 Plan, penalty-free. Such a consideration is important should you have concerns about overfunding the plan.
  7. Should relatives (particularly grandparents) wish to limit the size of their estate through gifting to family, any qualified education expenses paid directly to the institution are unlimited and excluded for gift tax purposes.
  8. College savings accumulated in a custodial account (UGMA or UTMA accounts) should be carefully considered. Once the beneficiary reaches your state’s age of majority (typically 18-21) the assets are turned over to the child and can be used for any purpose. In other words, the custodian no longer has control of the assets and how they are used. Additionally, once those assets are turned over to the child, they are treated more harshly for FAFSA (Free Application for Federal Student Aid) purposes.
  9. While a last resort in most cases, funds can be withdrawn from Traditional and Roth IRAs without an early-distribution penalty as long as they are used for Qualified Education Expenses. Funds held in such qualified retirement accounts are also exempt from consideration in FAFSA.
  10. While employer-sponsored retirement accounts (like a 401k) do not allow distributions for the payment of college expenses, account holders may roll a portion of those funds into an IRA account and subsequently withdraw funds from there for the payment of qualified education expenses.