From the day your child was born, somewhere in the back of your mind, you probably thought, “It’s time to start a college savings plan.”
Did you know that if your child has earned income, you can open a Roth IRA in your child’s name, and any funds held in this account will not count as a family asset when you apply for federal student aid? Is it possible to have no family assets when you apply for federal student aid? Yes – if you plan ahead.
If you own your own business, consider employing your child. Aside from creating the earned income to open a Roth IRA, this creates payroll, a deductible business expense (which will reduce your business income, and thus, reduce your taxes). This is a win-win-win situation. You pay less taxes, your child has a Roth IRA, and you have an excluded asset for federal student aid.
If you don’t own your own business, your might encourage your child to get a job or become self-employed. Track all the earnings and invest them in a Roth IRA.
You might also consider employing your kids as “household employees” by paying them for cleaning, lawn mowing, or any other task you might hire an outside worker to do in your home.
Imagine Family A, with $10,000 in a savings account, and Family B, who employed their child and saved $10,000 in an IRA. Assuming all other things are equal, the federal government will view Family B as in greater need of money and award funds accordingly. This is because in accordance with the rules for the Free Application for Federal Student Aid (FAFSA), Family B is viewed as having no asset. Which family would you prefer to be?
Everything you ever wanted to know about starting child Roth IRAs can be found in The Kid’s Roth IRA Handbook and you can learn more about rules for excluded assets in How You Can Maximize Student Aid.
It’s easy to think, “College is far away” but the earlier you educate yourself about the college process, the easier it will be to ensure your family is in the best position when college rolls around. We all have the same goal here – to comfortably afford to send our children to the best school possible.
Guest post by Author, Tracy Foote who blogs about financial parenting tips at Kids and Money Today.