In the Parents’ Names

THERE’S NO LAW that says college savings have to be in a special education account. Yes, these offer tax advantages. Using a special account also appeals to our mental accounting: We like the idea that the money is segregated, and the separate account makes it less likely we’ll spend the savings on something else.

Still, for many parents, keeping college savings in their own name often makes sense. You might stash the dollars in a regular taxable investment account, savings bonds, a retirement account or perhaps use it to pay down your mortgage. If your income is modest and there’s a good chance your family will receive financial aid, you should probably focus your spare cash on other goals, such as buying a home and investing for retirement. If it turns out your income is higher than expected and hence your aid eligibility is less, you could always pay for college by, for instance, borrowing against your home’s value or withdrawing your Roth IRA contributions.

Sticking college savings in a traditional IRA might also make sense if you have children later in life. What if your kids qualify for financial aid? You should think carefully about when to make your traditional or Roth IRA withdrawals, as you will learn in the next section.

Another consideration: Keeping college savings in your own name might be appealing if you favor flexibility. The fact is, you don’t know whether your kids will go to college, whether you’ll need the money for your own retirement, or what will happen to the tax code and financial aid formulas in the years ahead. Set against that is the tax-free growth offered by a 529 or a Coverdell. But given the relatively short time you have to invest for a child’s college education, you might decide the tax savings wouldn’t be that significant.

Next: Retirement Accounts

Previous: Kiddie Tax

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