I’ve been a believer in using 529 plans to save for college for years. Many years ago, I wrote an extensive article on how to choose a 529 plan. My reasons for investing in them were the small state tax savings and bookkeeping.
It wasn’t until recently, when reading about Obama’s 529 taxation plan that it hit me that the money comes out the 529 plan without paying taxes on gains. Typically one has to pay long or short-term capital gains. 529 plans offer a way around that, which can save some significant money.
If I were to put $20,000 in a plan for my two kids now, that may appreciate to $80,000 by the time they are ready to go to college in around 15 years. If I didn’t have that money in a 529 plan, I might have to pay 15% or 20% long-term capital gains tax on the $60,000 of gains. That’s a tax bill of somewhere between $9,000 and $12,000. I’d rather have that cash go to my kids education.
All of this steered me to an interesting article: Save for retirement now, get more college aid later.
I had always known that it’s better to save for own retirement than your children’s college. They can get loans to fund their education. You can not get loans to fund your retirement (at least not typically).
However, I had never thought about managing my finances in a way to maximize financial aid for college. I was blessed a full-scholarship, so I’ve never had to navigate the muddy waters of financial aid. This article makes the point that assets in retirement accounts are shielded from financial aid calculations.
Additionally it appears that assets in a company may be shielded from that calculation. However, investment property in our names are likely to not be shielded. I’ve long thought about putting our real estate investment properties into a corporate structure, but this would be the kick in the pants to get me to act on it. Of course, this assumes that it really is this easy to shield such assets. It’s something that I have to look into more.
Obviously income is going to be an important factor. I have to consult our tax advisor, but maybe there is a way, I could invest in growing my business and purposely keep my income low for a short time. It’s an idea, not sure how practical it is. Unfortunately, I “only” have 15 years to figure it out.
I suppose my first step would be to look at the financial aid calculations and understand what factors are weighed and how much they are weighed. There appears to be a good Expected Family Contribution (EFC) calculator here.
Anyone else go down this road of research? If so, please share anything you have to add in the comments.