Mind on Money: Facing the back-to-school challenge

Marc Ruiz Times Columnist 

Oh August, how you wound me. With two college kids going back to tuition bills and new habitats needing to be set up and stocked, as well as the general back-to-school expenses of new back packs, outfits, shoes and supplies and the reality that in the inflation-crazed economic environment of 2022, even this summer’s humble staycations and camping trips up north have created unpleasant levels of expenses which are waiting for me in the still unopened Visa statement on the kitchen counter, August is going to hurt.

So now seems as good a time as any to revisit strategies to pay for all this educational grandeur, and while most college planning columns have to do with what can be done for a hypothetical future cost, in this column it's game time, let’s talk about survival.

First, if for some strange reason the college tuition bill ended up being a huge surprise, it's actually not too late to look to the government for help. The Free Application for Federal Student Aid, or FAFSA, process can still be initiated for the fall 2022 semester. FAFSA is the process in which federally subsidized, federally unsubsidized and federal Parent PLUS loans are applied for and awarded for current students and families. If, as of yet, still unawarded financial aid is going to be needed at this point for the fall semester, I would definitely recommend communicating with your school’s bursar office about timelines and options. Having waited until the absolute last minute, there is now no time to lose.

For those who have prepared and accumulated funds in a 529 college savings plan, now is the time to use the account. I am still occasionally surprised to find families who saved their money using these tax preferred accounts and then don’t utilize them at tuition time. The last eight months aside, after a decade of decent returns in both stocks and bonds, many of these savings accounts have accumulated gains inside of them. For the most part, gains can only be accessed tax free if the money is used for qualified education expenses. Qualified expenses can include accredited tuition, fees, required technology, books and room and board up to a limit published by each college.

It’s also important to remember that if, like most families, college wasn’t 100% funded at the start of year one, a 529 plan can still be contributed to while a student is attending college. Most readers are fortunate to live in the state of Indiana, which I believe has one of the most attractive 529 tax credit programs in the nation. Currently the state offers a 20% tax credit on contributions into the state’s 529 savings plan up to $1,000. In short, this means if $5,000 is contributed to an Indiana 529, the state provides a tax credit of $1,000. The credit can be obtained by both parents and grandparents contributing on behalf of an Indiana student, although the student does not need to attend school in the Indiana. And here’s a little good news, next year in 2023 the credit will expand to $1,500. So even if a family is withdrawing from a 529 now to pay current educational expenses, it’s still possible to save money into the same plan for future costs and receive the tax credit.

If no college savings plan is in place, IRS rules do permit IRA accounts to be used in a limited manner to help fund college costs. Both Traditional IRA and Roth IRA accounts can be accessed for college expenses without tax penalty, but the rules do differ a bit. In order to qualify for penalty free withdrawals, funds must be applied to qualified costs of attendance published by each school, and expenses cannot be “double dipped” with funds withdrawn from 529 plans or received by federal education tax credits.

Traditional IRA withdrawals are still taxed as income, and because the rules are fairly technical, I strongly suggest seeking qualified tax and financial advice before utilizing this option. It's important to note, these special withdrawal rules do not apply to employer retirement plans such as 401(k) and 403(b) accounts. There may be other strategies to use with these types of plans, but they will be somewhat determined on the plan level. Once again, please get advice.

As a Dad, I’ve been suffering through August for a long time. Despite the hyperventilating we parents may be experiencing right now, we will survive. On the bright side, at least August is one of the five nice weather months we get in Northwest Indiana. I’ll just go with that right now, enjoy.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. Precious metal investing involves greater fluctuation and potential for losses. Past performance is not a guarantee of future results. Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.

To view Marc's past articles please visit https://www.nwitimes.com/business/columnists/f-marc-ruiz/