If you’re like most Americans, you spend the month of December neck-deep in Christmas parties, shopping for gifts, and planning for travel. As a result, the last thing on your mind is taking care of college planning details. While college planning can and should take place over a number of years, there are certain tasks that are time sensitive and need to be handled before year-end to maximize the financial benefit. Instead of starting 2019 wishing you had spent more time on college planning, take these five critical actions before the ball drops on New Year’s Eve!
1. Open Or Contribute To A College Savings Account
This is very important – Discuss with your advisor which financial instrument is best for you. There are a number of different possibilities and types of accounts you could contribute to and each family’s situation is unique. The standard “Put into a 529 plan” might not be best for you and could be costly. Get advice first and then contribute rather than having to try to undo something later on. If you have already received advice from an advisor who knows how the financial aid calculations work, then contribute as much as possible before year-end. Depending on which vehicle is best for you, you could reduce your tax liability for 2018, or you could pay the tax now and maximize your possible financial aid. See here about 529 plans
Since this is the season for giving, consider asking family members to contribute to your child’s college instead of buying gifts as it is an investment in your child’s future that will last much longer than new clothes, toys, or technology.
2. Maximize Your Roth IRA Contribution
Another college savings option is the Roth IRA. A Roth account can help you save for retirement and college simultaneously. If managed correctly, Roth IRAs can help you avoid possible high fees that some 529 plans charge, and they also offer increased investment options. As an added benefit, IRAs will not have any impact on your financial aid eligibility.
If you don’t need the money in the IRA for college expenses, you can use the money for multiple purposes, such as retirement, buying a house, or for an emergency fund. For 2018, you can contribute as much as $5,500 (or $6,500 if you are age 50 or older). Keep in mind that if your income is over $199,000 and you’re married filing jointly, you won’t be eligible to contribute to a Roth IRA, but there is always a backdoor Roth possibility. Finish the year strong by investing in both your future and your child’s future!
3. Review Asset Allocations
Regardless of what savings vehicle you use to create a college nest egg, it’s important to review your asset allocation annually to make sure the risk profile of your investments aligns with your child’s college time horizon. When your child is younger, you’ll most likely invest more aggressively because you have more time to recover from losses. But as your child draws closer to attending college, you’ll want to decrease risk and invest more conservatively to preserve principal.
4. Prepare To Fill Out The FAFSA
If you have not yet completed the FAFSA form, we would suggest that you start doing so as soon as possible. Here are some of the documents that you might need to do that. Start gathering documents now so you are ready to help your child apply as soon as you ring in the new year. Here’s what you’ll need:
- For the 2019-2020 FAFSA, you’ll need your 2017 income tax return.
- Bank statements and records of investments
- An FSA ID, which is a username and password that you can use to log-in to certain U.S. Department of Education websites. Each student and one parent of each dependent student will need an FSA ID to complete the FAFSA application. Create your ID early so you are ready to apply on January 1st.
- Personal ID for you and your child, such as Social Security number and/or driver’s license
- Lists of potential schools your child will attend
5. Create A Financial Aid Strategy
If your child is a couple of years away from applying for financial aid, this step could save you a lot of money! Because eligibility for financial aid depends on prior years’ income, there are certain financial moves that should be made as early as possible. For example, if your child is the owner of a 529 account, those assets will be weighted more heavily on the FAFSA than if it is in your name. Make sure your financial advisor is familiar with the financial aid calculations and process and what the different category calculations are.
If you have significant cash reserves, you could also pay down debt. Your debt doesn’t affect your financial aid eligibility, but your cash reserves will. Taking this step will reduce the amount of savings you have to declare on your FAFSA. Discuss this with your advisor to ensure that this strategy makes financial sense before you do so.
Another option applies if you are divorced or legally separated. In this case, only one parent will file for financial aid. Since it can make a major difference in the aid received, make sure the right parent files. According to FAFSA, the custodial parent is the one who should apply, and that is the parent with whom your child has lived with the most for the past 12 months. For financial aid purposes, ideally the parent who makes the least money and has the lowest amount of assets is the custodial parent.
There are plenty of other strategies to maximize the financial aid your child receives. Contact us to see what options are right for your situation which is probably unique and not the same as your neighbor’s one.
Get Started Now!
Do you need to take any of these steps before the ball drops on New Year’s Eve? College Planning America exists to help you prepare for every aspect of the college experience. We’d love to help you finish the year off strong and set you up for a successful 2019. Get started by emailing me at dcoen@sageviewadvisory.com or calling 800-814-8742.
About Dave
Dave Coen is a Financial Advisor with SageView Advisory and the CEO of College Planning America. Along with his retirement financial industry experience, he is a College Planning Specialist. He works closely with individuals and families to provide them comprehensive financial planning that addresses all elements of their financial picture. Learn more by connecting with Dave on LinkedIn.
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