Any withdrawals from an IRA you might take for your child or grandchild’s education (as well as your own or your spouse’s) can be withdrawn without the usual 10 percent penalty on early distributions before age 59 ½.But, should you really do that?
Many people set up IRAs specifically for education savings purposes.Is it the best idea?For some it may be a very good approach.For others, and let me go out on a limb and say for most people, there are better approaches for saving for college, including what’s often referred to as a 529 plan.
Raiding an IRA for education may be most appropriate if the IRA owner doesn’t need the IRA money.Another consideration for appropriateness of an IRA withdrawal for education purposes is if the taxpayer is in both a low tax bracket and has little or no current income to fund education expenses.
Wow, is this a dilemma or what for many people? The final decision has to be based on prioritizing your goals. This includes looking at your current stage of life, what you can be mostly sure of in the next few months, your view of your retirement, and many other considerations.
Even as the economy begins its slow crawl back, college costs are continuing to rise meaning parents are continuing to fight a tough battle between funding college and funding their own retirements.
In October 2009, the College Board reported the average published price of tuition and fees for in-state students at four-year U.S. public colleges was $7,020 for the 2009-10 school year, up $429 or 6.5 percent higher than a year ago. After adjusting for inflation, the average net price paid for tuition and fees by public four-year college students overall is lower in 2009-10 than it was five years ago, but higher than it was last year. Private four-year colleges saw a smaller increase of 4.4 percent or $1,096, but for a much higher average annual tuition of $26,273 for the school year.
Also in October ‘09, the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI) reported in October American workers who held 401(k) accounts consistently from 2003 through 2008 suffered a 24.3 percent average drop in their account balance during 2008’s bear market.
Despite these huge challenges, it’s particularly important for parents to make retirement their first priority.That’s right, make retirement your first priority.Your children can always take on loans and search for scholarship and grant funding to tide them over.
Parents can offer help in a better economy, but the momentum lost in saving for retirement is much tougher to replace.There are no loans for retirement.There are no scholarships for retirement.There are no stipends based on your retirement lifestyle.As most of you know, the burden of funding your retirement is on your shoulders, and yours alone.
There are serious financial consequences to breaking into 401 (k) and other tax- advantaged retirement savings, and parents tempted to do so should look for other alternatives.A July 2007 Country Insurance and Financial Services survey found not 25 percent of respondents thought it would cost less than $50,000 to send a child to a four-year college (on average, public schools have already surpassed that number when adding room and board).The same survey found that nearly half believe paying for college is more important than their retirement, which most qualified experts would advise against.
Before you pick between yourself and your child by raiding your retirement accounts, stay tuned to this blog over the next series of posts for tips to help you decide what is in your best interest.
With sensible planning and the full cooperation of a responsible child, this condo could become your child’s.If your child is planning to stay in the city where they’ve graduated, parents might consider a plan to sell the property to their child upon graduation. This could give the grad a great start on their finances during their first earning years.
Another reason to consider this approach includes potential estate tax benefits.Taking the condo out of your estate can lessen the estate tax burden on your heirs.For a child who wants to become a real estate investor, he or she will be able to take advantage of the inherent benefits of real property ownership.
Students are pretty possessive about their space and privacy in college. This is one reason why you don’t see many parents crashing in their kids’ dorm rooms for the weekend. Another reason is, hey, you’re an adult and you have your own stuff to do and take care of.
But if you have regular business or vacation plans in the city where your kid goes to school, see if that might be one more incentive to invest as long as it doesn’t cramp your style or your child’s.
Another idea is summer use of the property. Depending upon the location, the condo could become a summer rental.Or, you might use it yourself for summer vacations with the entire family and friends.
Buying a property in the immediate vicinity of campus might be great for your kid who rolls out of bed late for class, but bad for you if you’re expecting your property to appreciate greatly. This is especially true in the rural parts of the country.
In most markets, on-campus real estate is notoriously low on appreciation (think how you’d feel buying next door to Animal House). This is why investors do better buying in established, off-campus residential areas or developments that are near but not on campus.
Your child may have to miss the experience of living with their peers, though, and it’s a big consideration.Some of the growing up experience of the college years is the personal interaction of living with near strangers who might become close friends in by the end of the school year.
Most people think in terms of owning a student condo for four years, or maybe a little longer for very generous parent. A decade ago, that was a relatively easy commitment to make as housing prices were skyrocketing and buyers always seemed to be circling.
Today, however, owners have to consider it may take considerably longer to sell the property at a profit. Real estate investors of all kinds have to consider the total cost of ownership.Few do.Not only are the purchase and sales price important, but investors must account for the necessary investments in maintenance along the way, the 5 to 6 percent sales commission right off the sales price to pay a selling broker, lost opportunity costs of investing in other steadier investments such as government bonds, and the comparison of university rental rates versus the mortgage, taxes and insurance payments made in order to own the condo.Finally, will you actually charge your student rent?If not, this is lost income.
Further complicating this decision is the question of not knowing if you’ll be able to sell the condo when your student graduates.Unlike years past, many condos are the market for months, if not years.Do you really want to continue owning this condo for years after your student graduates?
If you are already a homeowner, you know what owning a home costs.There are mortgage payments, property taxes, insurance, homeowners or condo association dues, and maintenance costs.You have to ask yourself can you cover these expenses in a remote residence (including those nasty late night and weekend emergencies) without grousing too much.
Keep in mind these costs could be considerably higher for your child’s property near the University of Chicago, for example than the costs would be in Omaha. Your insurance costs might be higher than you’re used to, also.It’ll probably cost more to insure this property because even though it’s your child, you’ll essentially need to have insurance as a landlord based on the potential damages occurring in a rental property.
If your child thinks you’re buying them a crash pad or party palace, you might already in trouble.Your student may have to be responsible enough to act as an onsite landlord making sure the interior and exterior of the property stay in livable and salable condition. That’s not a job every student can handle.Unless you know you can afford housekeeping and maintenance help, any doubts on your part should dissuade you from such a purchase.
There are several questions you should ask yourself before launching into this real estate venture. If you have any suspicions your child might drop out, take a break or transfer from her or his chosen school, do you want to risk becoming a landlord yourself or paying for an empty property?Will you have the time to check in-person on the property at least a few times every year?What if your student’s school changes the rules and forces students to reside on-campus?
For parents with investment dollars to spare and who might have a child attending college in an area with deflated real estate markets, there’s never been a better time to invest in condos or single-family homes to house their student(s) during undergraduate or graduate years.The beauty of this idea is the purchase of the condo or single family home provides tax breaks and potential income and investment appreciation for the parents, while not throwing away money paying rent to the university.
But, it’s very important to consider both the pros and the cons because the potential rewards of buying housing for a student can carry many risks. Over the past decade, the once-galloping real estate market made condo and home purchases in college areas attractive to parents looking for an actual return on the room and board expenses they would otherwise throw at their kids’ schools. With the double-digit home appreciation of the 1990s, parents looked at buying property as a way to essentially house their kids for free.
Today, in most markets, condo and home values have fallen, which makes for a potentially better investment proposition. Over the next few posts we’ll show you what parents need to consider before taking this plunge.