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You've still got a shot at financial aid, but your higher income means you'll be expected to chip in more of your own money. You also get more benefit from tax-deferred accounts than lower earners. That means it makes more sense for you to take advantage of tax-advantaged options, despite their restrictions on how and when you can spend the money.
Strategies for your bracket include:
Avoid custodial accounts such as UTMAs and UGMAs, which count heavily against your child in financial aid calculations.
Weigh the risks of Coverdells and 529 plans. As noted above, Coverdells and 529s can limit your ability to take valuable education credits and may be a factor in reducing financial aid awards. On the other hand, the tax breaks will outweigh the risks for many people in your bracket, particularly if you expect your income to continue growing. Even if Congress fails to extend the tax-free treatment for withdrawals, any distributions would be taxed at your child's (presumably lower) tax rate.
Beef up savings in your own name as well as your home equity and retirement accounts, for the reasons noted above.
Consider savings bonds. If you don't like risk, savings bonds offer a safe (if low return) way to save, plus a potential tax break: the interest on savings bonds is tax free under certain circumstances. (The owner of the bond can't be the child, for example, and the money must be used for tuition or fees.) The ability to take advantage of this break disappears as income rises; for 2008, the benefit was phased out completely when a single-filer's income exceeded $82,100 and married incomes exceed $130,650. For more details, visit the U.S. Treasury's Web site.
Movin' on up
You're in the 28% bracket when your taxable income is up to:- $171,550 for single filers
- $190,200 for heads of household
- $208,850 for marrieds filing jointly
It's not impossible for you to get financial aid. After all, anyone can get loans, and your child may score some merit (rather than need-based) scholarships. If you've got more than one child at pricey schools, you also could get some help. Just don't count on getting much.
Good strategies for you include:
Invest in Coverdells, particularly if you'll have private school expenses before college. Coverdell money can be used for elementary, middle or high school education expenses or tutoring. The ability to contribute ends for singles with AGIs over $110,000 and marrieds with AGIs over $220,000.
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Choose tax-wise strategies if you save in your own name. You'll pay 15% on dividends and long-term capital gains, but 28% on interest and short-term gains. Limiting your trading and investing to low-turnover mutual funds can help cut your tax bill, while tax-free municipal bonds might be an appropriate choice for the fixed-income portion of your savings.
Keep saving for your own retirement, and build up home equity.
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Penalized for saving for college?Higher education costs are increasing, but students who seek financial aid can lose out if they or their parents save a lot.
Top of the heap
You're in the 33% bracket if your AGI, married, single or otherwise, is up to $372,950. Above that, you're in the 35% camp.Strategies for people in your stratosphere include:
- Invest in 529s. Unlike Coverdells, 529s have no income limits for contributors. Besides the tax breaks, these college savings plans offer a big estate-planning advantage. Money contributed to a 529 plan is considered a completed gift, which means you don't have to worry about paying estate taxes on your account should you die. But you retain control over who gets the money and can change beneficiaries any time you want. In addition, you can make a one-time contribution of up to $60,000 and not have to worry about gift taxes (as long as you make no other gifts to that beneficiary for five years). There are no income restrictions for contributors, and many plans allow you to contribute a total of over $300,000.
- Consider UTMAs and UGMAs if 529s don't do it for you. If you want even more choice over your investments, old-fashioned custodial accounts give you more control. You can invest in individual stocks and bonds, making all the buy-and-sell decisions yourself. Gains are taxed at your child's presumably lower rate. The big disadvantage: you lose control over the money when your child reaches a certain age, typically 18 or 21, depending on the state.
Updated May 20, 2009
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