100 smart money tips for 2010
Joseph Hurley
10 ways to pay college tuition in 2010

Tip 9Keep your retirement money for retirement.

When it comes time to pay for college, you may be tempted to tap your retirement accounts. But why risk increasing the chances that you become financially dependent on your child later in life? In most situations you will be better off keeping your retirement accounts intact and taking out loans for your child's college expenses.

Sure, parents withdrawing money from their IRAs prior to age 59½ can avoid the usual 10 percent, early-withdrawal penalty under the waiver for qualified higher education expenses. But doing so will not avoid any regular income tax. In fact, for Roth IRAs you could be triggering taxable income instead of keeping it tax-free by deferring distributions until after age 59½.

Distributions from 401(k)s and IRAs also will hurt your child's eligibility for financial aid. They must be included in "base-year income" on the following year financial aid application, regardless of whether they show up on your tax return as income.

Tip 10Be careful making changes.

Last year, the IRS allowed you two investment changes to your 529 savings plan. However, at the time this article was written, the IRS had not extended this rule into 2010, leaving you just one investment-change opportunity for this year. If early in the year you decide to switch out of one option in your 529 plan and into a different one, you may be precluded from doing it again until 2011 rolls around.

You can also roll over your 529 account tax-free to a different 529 plan as long as there has been no other rollover for your beneficiary during the previous 12 months. Unlike the investment change restriction which is policed by the 529 plan, the rollover restriction must be monitored by you.

Neither restriction applies if the beneficiary is being changed on the account. This exception provides a great deal of flexibility to the family with at least two children.

<< Read all 2010 money tips

Read tips from previous years: 2005  |  2006  |  2007  |  2008  |  2009  | 

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