For baby boomers with kids going off to college, one of the biggest decisions is how to pay for tuition.
This week, certified financial planner Walt Romatowski, president of Castellan Financial Advisors in Roseville, Calif., offers a road map.
He's one of our "Ask the Experts" panelists, who answer readers' online questions on money matters.
QUESTION: I'm about to start paying for my daughter's college education. The tuition per year is approximately $30,000. I have certain buckets of money to tap into, including about $60,000 in stocks, bonds, etc. Also, my wife has $70,000 in cash and I have $25,000. Since the market is so crazy now, should I use the liquid cash to start?
I will be paying in two installments, so I need to decide quickly. One payment is due at the end of July for $13,500. For later payments, we have life insurance policies with a total cash value of about $14,000. Would it be a good idea to use this cash? I don't see in the fine print where it will change my policy payout at the time of death.
My wife and I are both in our late 50s. We have other retirement savings in 401(k) accounts that we don't plan to touch. I also have two pensions coming to me at some point. I have the money to pay for college, but am just not sure where to draw from first. I have a financial planner who has been of little help. Your advice is appreciated.
ANSWER: From your comments, I assume that your retirement savings and pensions will be sufficient to allow you to live comfortably during your retirement years. Paying for your children's education should not be at the expense of your retirement.
Make sure that you have factored in retirement expenses related to health insurance and possible long-term care. You also should maintain an emergency fund in case of a job loss or inability to work for any reason.
If you have not already done so, you should explore the possibility of obtaining financial aid for your daughter's education expenses. Many parents don't even try, but financial aid - loans or scholarships - may be more accessible than you think. Check out this website: http://www.finaid.org.
Before discussing where you should draw the money from, let's discuss gift taxes.
Under current law, you and your wife are allowed to gift up to $13,000 each per year (that's the "annual exclusion" from federal gift taxes). This means the two of you could gift $26,000 to your daughter, with the remaining $4,000 going against your "lifetime gift tax exemption," which is currently $5 million. Under this scenario, you would be required to file IRS Form 709 when making the gift.
You can avoid the possibility of exceeding your annual gift tax exclusion amount - and save a lot of paperwork - by taking advantage of the "educational exclusion for payments made directly to a qualifying institution." The payment must be made directly to the institution providing the education, not to the (student) receiving the education. The payment must be for "tuition only."
As to where you should draw the money from: Since you have cash in hand, which is probably not earning very much, I would use that first.
If your cash is parked at very low-paying financial institutions (i.e., 0.5 percent interest rate), check out Bankrate.com for better deals. Online banks are safe, as long as they are FDIC-insured. The rates will not make you a millionaire, but you should be able to get close to 1 percent.
Be patient with your stock and bond investments. You should see growth over the long haul.
You can withdraw some or all of the cash value of your insurance policy to help pay for your daughter's education. The amount you can withdraw is generally limited to a percentage of the cash value and varies by policy and company. In addition, the insurance company will charge processing fees for withdrawals.
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