Q. I'm just about to start paying for my daughter's college education. The tuition per year is approximately $30,000. I have certain buckets of money that I will be tapping into. I have about $60,000 in stocks, bonds, etc that can be used. My wife also has $70,000 in cash and I have $25,000 in cash. Since the market is so crazy at the moment should I just use the liquid cash to start? I will be paying in 2 installments. One is due at the end of July for $13,500. So I need to decide quick.
Also, for later payments, we have life insurance policies with a total cash value of approx. $14,000. Can I just take this cash out to use? Is this a good idea? I don't see in the fine print where this will change my policy payout at the time of death. My wife and I are both in our late 50s. We have other retirement savings in 401(k) accounts that we don't plan to touch. I also have 2 pensions (a total of 30 years) coming to me at some point.
I have the money to pay for college just not sure where to draw from first. I do have a financial planner who has been of little help, unfortunately. Your advice is appreciated.
Steve - Sacramento
A. From your comments, I assume that your retirement savings and pensions will be sufficient to allow you to live comfortably during your retirement years. Just make sure that you have factored in expenses related to health insurance, and possibly, long-term care. You also should maintain an emergency fund in case of a job loss or inability to work for any other reason. Paying for your children's education should not be at the expense of your retirement.
If you have not already done so, you should explore the possibility of obtaining financial aid for your daughter's education expenses. Many parents don't even try, and financial aid may be more accessible than you think. Check out the following website: www.finaid.org
We'll get to where you should draw the money from in a moment, but first, let's discuss Gift Tax issues.
Under current law, you and your wife are allowed to gift up to $13,000 each per year, to your daughter ("annual exclusion" from federal gift taxes). This means that the two of you could gift $26,000 to your daughter, with the remaining $4,000 going against your "lifetime gift tax exemption," which is currently $5 million. Under this scenario, you would be required to file an IRS Form 709 when you make the gift.
You can probably avoid the possibility of exceeding your annual gift tax exclusion amount and save a lot of paperwork, by taking advantage of the "educational exclusion for payments made directly to a qualifying institution." The payment must be made "directly" to the institution providing the education, not to the individual receiving the education. The payment must be for "tuition only."
Now back to where you should draw the money from: Since you have cash in hand, which is probably not earning very much, I would use that first. If your cash is parked at very low-paying financial institutions (ie.0.5 percent interest rates), check out www.bankrate.com for the best deals. Online banks are safe, as long as they are FDIC insured. The rates will not make you a millionaire, but you should be able to get close to 1%.
Be patient with your stocks and bond investments. You should see growth over the long haul.
You can withdraw some or all of the cash value of your insurance policy to help with paying for your daughter's education. The amount you can withdraw is generally limited to a percentage of the cash value, and varies by policy and company. In addition, the insurance company will charge processing fees for the withdrawal.
Unless you have a modified endowment contract (MEC policy), withdrawals are treated as taxable income if you take out more than what you invested in the policy. Depending on the specifics of your policy, cash withdrawals may reduce your death benefit. You should check with your insurance contact regarding these issues to make sure you understand all the details before you initiate a withdrawal.
In summary, use your cash to make a direct payment to the educational institution for tuition, and gift the balance to your daughter for her other expenses. Don't forget to investigate potential financial aid.