Too Late to the 529 Game? Here Are a Few Alternative Ways You Can Help Fund Your Child’s Education

As distant as they may appear, your child’s college years will get here sooner than you imagine.  Many people intend to start 529 plans for their children’s education, but may not have the extra cash flow necessary to get the ball rolling early.  In other cases, even after they start the plan, it is easy to justify unexpected expenditures that detract from saving, and they now find themselves assisting their children with college applications while wondering, “Where are we going to find the funds to pay for it all?”

I have been diligent about saving for retirement, but have failed to save enough for my child’s college expenses.  Do you have any suggestions of ways to help my child now that it’s too late to start a 529 plan?

Traditional & Roth IRAs

Though not ideal, investors can withdraw funds from their Traditional and Roth IRAs to pay for qualified higher education expenses of the investor, spouse, or any child or grandchild of the aforementioned without incurring the 10% early distribution penalty tax.  However, this applies only to the 10% penalty, as the taxable portion of an IRA withdrawal is still subject to income tax.

Qualified higher education expenses include the following incurred at a post-secondary eligible educational institution including those relating to graduate level courses:

  • Tuition
  • Books
  • Supplies and Equipment
  • Room and Board (assuming student is attending ½ time or greater)

Eligible institutions are typically accredited institutions, including vocational schools that offer credits towards a bachelor’s degree, an associate’s degree or another recognized post-secondary credential.

Keep in mind that these rules are strictly applied to Traditional and Roth IRAs, but not to other retirement plans such as company sponsored 401(k) plans.  If funds are withdrawn for the same purpose from a non-IRA retirement plan before age 59 ½, the 10% penalty will apply.

U.S. Savings Bonds

Timing the redemption of your U.S. Savings Bonds (Series EE or Series I) to correspond with a dependent attending college is a wise tax move.  All, or a portion, of the bond’s interest income may be excluded from income if the proceeds are used to pay tuition and required fees at eligible institutions.  The exclusion amount is subject to phase-out limitations.  To qualify for the exclusion, the bonds must meet the following conditions:

  • Issued after 1989
  • Purchaser was over the age of 24
  • The qualified higher education expenses must belong to the taxpayer, spouse or any dependent
  • Either the taxpayer or spouse must have purchased the bond

If you are considering using U.S. Savings Bonds proceeds for college expenses, then pay special attention to the AGI phase-out limits, and attempt to defer any pertinent income to tax years after the bonds have been redeemed.