Take From Your Savings
Now is the Time to Use Your Money
When you're deciding where your family share is going to come from, don't limit yourself to what's available from income. Expect to contribute a portion of your savings.
Your Resources
If your family has assets that are readily available (e.g., savings or mutual funds), plan to use some of that money for your child's education. The current formula that calculates the expected contribution uses a five percent spending rate as a guideline. We recommend this as a starting point, but you are the best judge of whether you can contribute more or less than five percent.
Your Child's Resources
There's often money in your child's name, too. If your child qualifies for aid, 35 percent of that money will be expected go to college expenses in the first year, 35 percent of what is left over the second year, and so forth through the four years.
The net effect of this formula is to expect that about 80 percent of student savings will go towards college expenses. Each year your child should contribute the amount specified in his award letter.
If not receiving financial aid, your child needs to decide how to spend student savings. As a rough guideline, divide the total by five. Use one-fifth each year (assuming four years of education), and your child will have one-fifth remaining upon graduation.
IRA Accounts
Traditional
If you've set up an IRA account, you're permitted to withdraw money for college expenses without paying the 10 percent early withdrawal penalty. However, you will owe income taxes on the amount withdrawn.
Roth IRA
You may withdraw your contributions to a Roth IRA to pay for college expenses without having to pay either income tax or the 10 percent early withdrawal penalty. Any investment earnings in your Roth IRA are also available for withdrawal without the 10 percent penalty, but subject to regular income tax. You may withdraw investment earnings tax-free if you are over 59 1/2 and you've had your Roth IRA for at least five years.
Coverdell Education Savings Account
These savings accounts used to be known as Education IRAs. You can use your money at any time to pay for qualified education expenses without paying federal taxes. Learn more about Coverdell Education Savings Accounts in IRS Publication 970, Tax Benefits for Education.
Qualified Tuition Programs, or 529 Plans
College Savings Plans
Use plan funds to pay for qualified education expenses. The beneficiary will not have to pay federal income taxes on plan earnings. Learn more about College Savings Plans.
Prepaid Tuition Plans
Redeem the plan at an approved college. The beneficiary will not have to pay federal income tax on plan earnings. Learn more about Prepaid Tuition Plans.
