<p>Let me know if my thinking is straight here:</p>
<p>We've always figured we'd save the maximum allowed for retirement and when our oldest hit college age then we'd stop the deferred compensation payments and start paying tuition out of pocket.</p>
<p>If we do not contribute to our retirement plan then we are going to phase out of various deductions/ tax credits to a certain degree and pay more federal income taxes.</p>
<p>Since federal tax paid is a deduction for determining our available income to pay tuition under both the Federal and Institutional Methodology methods AND since 2 financial aid packets our son has received from private universities show they will meet his need with substantial grants, then the increase in tax paid in 2006 should be offset by 46-47% (we are in the maximum percentage income contribution bracket in the FASFA and IM contribution tables) increase in aid next year. </p>
<p>Is my thinking correct? We still have a lot to pay and it amounts to more than our take home pay will increase when we stop deferred compensation deductions. We have no way around it because private school is going to cost no more than the flagship state university which gave us no financial aid. (they don't give anybody aid)</p>
<p>If we save $15,000 tax deferred and borrow $15,000 for tuition it should be an approximate wash. I think I'd sleep better at night, tho, without the big borrowing. They take 3% (I think) up front out of any PLUS loan. This will be a moot point in 4 years when my husband retires and is unable to shelter any income in deferred compensation. Our income level will be about the same when he retires because he will supplement his pension with part-time work. We are fortunate ds was admitted to schools with good aid policies. We have 4 more children to send thru college. Is there a maximum amount of PLUS loans you can take out?</p>
<p>Any advice\input on the situation? Thanks, momoffive</p>
<p>Your thinking is on track.</p>
<p>Putting money into retirement plans is a generally good tax strategy. But the strategy gets more complicated starting in the base income year for college due to financial aid considerations.</p>
<p>From a financial aid point of view-- putting money into a retirement vehicle can decrease your fincancial aid for the reason you suggested. But it really depends on your income level. Income tax paid is an considered an expense on FAFSA and Profile, and it gets deducted from income when calculating the EFC. Contributing to an IRA (for example) decreases taxes, reduces available income, which reduces EFC, and therefore increases potential financial aid.</p>
<p>A lot of families stop contributing to their retirement accounts during the college years, in part because money is tight, but also because it doesn't make as much financial sense as it did in non-college years.</p>
<p>But a lot depends on your tax situation, and your income level. I'd use the calculator at FinAid to run a few different sets of numbers and see how it impacts your EFC. FinAid also has a good section on the Plus loans.</p>
<p>I read the following:</p>
<p>You can always borrow for college. You cannot borrow for your retirement.</p>
<p>There is nothing wrong with borrowing for college. It is a LT debt to finance a LT asset (college education) this makes sense. In essence it is a liability and a off balance sheet asset wash.</p>
<p>sblake, I thought contributing to a retirement account would increase efc, b/c the colleges view it as income available to pay COA. I thought, therefore, that the contribution for that year, is added back as income.</p>
<p>Oops. That should read:</p>
<p>"Contributing to an IRA (for example) decreases taxes, which INCREASES available income, which INCREASES EFC, and therefore REDUCES potential financial aid."</p>
<p>Lost my mind there. :)</p>
<p>sblake7, yes the deferred compensation deduction will reduce taxable income and income taxes., but the amount deferred is added back to taxable income to arrive at the FASFA and IM Available Income base amount. Therefore our Available Income per the FASFA and IM tables will go up (since federal taxes are lower) and our EFC will go up. Our grant aid would then go down. If we do borrow our EFC, then we'd have student loan interest to pay which would hopefully be offset by earnings in the tax-deferred account, yada, yada, yada. </p>
<p>I don't know that dollar wise it will come out any different in the end. I've printed out the underlying FASFA and IM formulas and tables. I'm a CPA and think my analysis is correct, but wanted to confirm it. I guess it really just depends on what we feel more comfortable with. </p>
<p>momoffive</p>
<p>NE Mom-- exactly right. I corrected myself as you typed.....</p>
<p>Stil having my first coffee. :)</p>
<p>sblake, Our posts crossed. Thanks for clearing that up for me.</p>
<p>I just edited this to say that we crossed again. I am glad that I finally understand this. You are a good teacher :)</p>
<p>mom of 5-</p>
<p>Yeah-- you're thinking is exactly on track.</p>
<p>Do try out the FinAid calculator. Since you're a CPA, you'll probably enjoy crunching the various numbers with it. You can get both FM and IM EFC-- try it with and without the retirment contribution to see how much it impacts your EFC:</p>
<p><a href="http://www.finaid.org/calculators/scripts/estimate.cgi%5B/url%5D">http://www.finaid.org/calculators/scripts/estimate.cgi</a></p>
<p>Fund retirement. Money available can later be used to pay debt. To take cash to pay COA college can never be recovered. Look at the problem philosophically rather than figures. You will discover options and choices are more when saving for retirement than paying cash for college and avoiding immediate debt. You can later justify your thinking by using figures.</p>
<p>I will do the calculations and report back. I still think it will come out very close.</p>
<p>I will wait until we get the last financial aid package from the last school. It was mailed last Wednesday and hopefully will be here today. </p>
<p>Ya never know-it just might get ds a free ride (haha, yeah right) and all my problems solved!</p>
<p>momoffive</p>
<p>By “deferred compensation” I don’t mean IRA or 401(k) contributions, but company sponsored deferral, which is not even shown as income for tax purpose. This deferred amount is still part of company asset and can be lost if the company goes bankrupt.</p>
<p>This is a very old thread. Why did it pop up now?</p>
<p>Fully fund your retirement. You can always pay back loans with your retirement income. HOWEVER if you don’t fund your retirement, that is money you will never recover. You won’t be able to catch up with those contributions in future years.</p>
<p>I’m not a financial planner…but that is what we have done. We continued to fully fund our 401K and 403B accounts…FULLY. This means our retirement income will be better when the time comes. We have taken out some small home equity loans and are well positioned to pay them back either out of earnings OR retirement earnings…whichever happens. If we had stopped funding our retirement accounts in deference to college, we would have had MUCH less retirement income as we’ve been making college payments for almost 7 years…far too long to ditch retirement savings, in my opinion.</p>