Planning College -- the financial side

Parents Forum
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<p>thisoldman,</p>

<p>
[quote]
What do you get when you put light on an idiot? Enlightened Idiot.

[/quote]
</p>

<p>lol!!! </p>

<p>Thanks, librarian377.</p>

<p>sueinphilly, maybe when the time comes we should go car shopping together to save money by buying in bulk! (I looooove buying cars, the whole negotiating bit, which is why my friends take me with them when they buy cars.)</p>

<p>goaliedad, thanks for the info; I appreciate it! It is indeed my Roth that I intend to use for this. The little bit of money that's currently in there will appreciate the company!</p>

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<p>My original question was:
[quote]
Is it a good idea to move non-sheltered funds to a sheltered account, in this case an IRA, before the tax year used for filing FAFSA, given that early withdrawal penalties are waived when withdrawing from an IRA for education purposes?

[/quote]
</p>

<p>And the answer from you savvy posters, you, was yes. (Thanks!!!)</p>

<p>Now I have a follow-up question....</p>

<p>I'm currently depositing money monthly into the 529 plan and into a non-sheltered fund that I first mentioned. </p>

<p>Just before 2010, which is the tax year on which my first FAFSA will be based, should I stop these monthly deposits and instead deposit these monies into my 401K as a pre-tax deposit, thus lowering my AGI in 2010?</p>

<p>Should I need the money to pay for education expenses, I could not withdraw it (without huge penalties); I could, however, get a loan from my 401K. Assuming I can afford to do so, is increasing my 401K contribution in this way helpful for determination of EFC?</p>

23

<p>any tax deferred money you put into that 401K in 2010 will be added back in for tax purposes. Yes, Uncle Sam expects you to save for retirement but thinks that you have that money available to spend also. </p>

<p>FWIW, if I had to get more cash I could reduce my tax deferred contributions or take a loan against it. I think the rate to borrow was really really low (3.3%?) last time I checked that website.</p>

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<p>
[quote]
FWIW, if I had to get more cash I could ... or take a loan against it. I think the rate to borrow was really really low (3.3%?) last time I checked that website.

[/quote]
</p>

<p>Bad strategy on 2 counts. </p>

<p>First, if you are unlucky enough to lose your job with a loan against a 401k, the plan administrators are required to collect the balance in full within 60 days. Talk about being in a cash pinch!</p>

<p>Second, when those assets you borrow against are only earning the 3.3% you are paying back, you are shortchanging yourself on the growth of your retirement money. You can generally make it perform better in a diversified portfolio over any significant (10 year) time frame.</p>

25

<p>I understand your points and it's a last case scenario.
I think it's better than a Plus loan though if it's only 10K or so for a year or 2. </p>

<p>I'm not going to lose my job in the next 4 years. that is guaranteed. I work for the Dept of Defense. Business is booming :-(</p>

26

<p>Owlice...Wow! I am impressed! You are a wonderful and thoughtful mom! I admire your value of education for DS and diligence to save.</p>

<p>thisoldman...Another spew of cab on my screen!;) Thanks for the laugh!</p>

<p>sueinphilly...D2 grumbles every time she has to drive her old Camry to school...it's been in the family so many years I forget how old it is but it has close to 200k miles on it!;) And I agree about your job stability. :(</p>

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<p>My BF had a toyota with 260,000 miles on it before he replaced it (with another used toyota). At least we don't have to worry about dings in our cars from rogue carts at the supermarket..... I'm mean really, who cares at this age...</p>

28

<p>Owlice,
Former 401(k) administrator here: If you leave your job and the loan is not paid back in 60 days, it becomes taxable AND subject to the 10% early withdrawal penalty. Ouch. </p>

<p>And since a loan does not have taxes deducted from it at the time of issue, you'll owe those taxes out of pocket, not out of withholding. If you are also withdrawing your balance, at that point your employer is required to withhold at 20%, which may or may not be enough to cover your federal liability, and does not include your state liability. Some states have wised up and asked for state withholding, but not many.</p>

<p>That said, I love your philosophy about money. Love and reality, learned through experience. We try to do the same around here, but I think you've been more successful!</p>

29

<p>Okay, I'm confused...</p>

<p>sueinphilly,</p>

<p>You posted:</p>

<p>
[quote]
any tax deferred money you put into that 401K in 2010 will be added back in for tax purposes. Yes, Uncle Sam expects you to save for retirement but thinks that you have that money available to spend also.

[/quote]
</p>

<p>When I did the FAFSA, it asks for my AGI, which does not include the tax-deferred funds going into the 401K. (I took the AGI from my tax return.) Increasing my contribution to the 401K decreases my AGI, and thereby decreases my EFC. Am I wrong about this?</p>

<p>(I don't know that I'd actually do this -- increase my 401K to decrease my EFC. I'm just trying to figure out how all this works, is all.)</p>

<p>Your point about reducing the tax-deferred contributions to get more cash is well-taken. Another thing I could do is take a disbursement from an IRA if I needed to, which occurred to me when discussing my original question, but didn't occur to me until just this minute!</p>

<p>goaliedad, </p>

<p>Losing my job would definitely put a crimp in college spending! I would expect that if I did need to tap into this money, it wouldn't be for a lot of money. It's not as if I have loads, after all!</p>

<p>NorthMinnesota, </p>

<p>Thanks, and I wish I were in the position to not have to be quite so thoughtful about money! On the car front, my little Honda has nearly 200K miles on it, and is making scary, "take me to the mechanic, pleeeeease" noises at the moment, alas.</p>

<p>CountingDown,</p>

<p>Thanks! Yes, taxable and penalty would definitely be an ouch! Getting a home equity line of credit -- I do have equity, even with the recent downturn in the market -- would probably be a good idea should I take any sizable loan, then, yes? I'm unlikely to take a big loan, but should that ever be necessary, a line of credit might be good insurance against the possibility of having to pay penalties. (I belong to a good credit union and getting a line of credit would be pretty easy. Not that I plan or expect to lose my job anytime soon!)</p>

<p>Withdrawing from an IRA would be more likely than taking a loan from the 401K, though, since that can be done without penalty for education expenses.</p>

30

<p>I should have written "tax deferred 401k contributions will be added back for FAFSA purposes".</p>

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<p>sueinphilly, thanks, and wow! I think I need to look at the actual forms instead of the CC calculator, then, because that will make quite a difference to my AGI. </p>

<p>S is only in high school, and <em>I</em> have college homework to do....!! Sheeeeesh!!! :D</p>

32

<p>IFAP</a> - Information for Financial Aid Professionals</p>

<p>good stuff here, including pell grant table </p>

<p>but here is the 2008-2009 guide
<a href="http://ifap.ed.gov/eannouncements/attachments/0809EFCFormulaGuide.pdf%5B/url%5D"&gt;http://ifap.ed.gov/eannouncements/attachments/0809EFCFormulaGuide.pdf&lt;/a&gt;&lt;/p>

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<p>Thanks, sueinphilly!</p>

<p>I wonder how close the CC calculator is to actual EFC....!</p>

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<p>FinAid</a> | Calculators | Expected Family Contribution (EFC) and Financial Aid</p>

<p>practically to the penny</p>

<p>One of the other widely used ones out there has old data in their tables and doesn't give as accurate a picture(I don't know about CC, I didn't use that one)</p>

35

<p>Thanks!</p>

<p>Dang! I'd better start selling my blood or some such!</p>

36

<p>Why save??</p>

<p>It does seem that by saving, you are closing the door on financial aid. I ran some numbers through the finaid calculators and found that we could qualify for $677 in aid.</p>

<p>But we saved because WE wanted to be in control of college choice once the acceptances were in. If you don't save, you are at the mercy of outside forces: will your first choice give you enough need-based aid? will it give you enough merit aid? will you get that mega-buck outside scholarship?</p>

<p>In our case, the answers would have been no, no, and no. Good thing we saved!</p>

37

<p>OK, y'all are talking way over my head, but here's something that popped into my inbox this morning and thought it might be helpful. Haven't read it myself yet, but LOOKS like good info:</p>

<p><a href="http://school.familyeducation.com/college-fund/college-prep/34560.html?WT.mc_id=FE_Your-Child_12-18_2008-04-09_email%5B/url%5D"&gt;http://school.familyeducation.com/college-fund/college-prep/34560.html?WT.mc_id=FE_Your-Child_12-18_2008-04-09_email&lt;/a&gt;&lt;/p>