Set up savings accounts
Open a UGMA custodial account or a Coverdell education savings account to save for and manage your child’s educational expenses. Check with your financial advisor on contribution limitations and tax benefits (or potential penalties) with each account.
Get the family involved
Having outside family members, such as grandparents, help pay tuition can be a win-win situation. The payments will not trigger gift tax implications when made directly to the school, and the payments can be an effective estate-planning strategy.
Think carefully before tapping retirement
Pulling money from a retirement fund, especially through a 401(k) withdrawal, may have serious tax implications. If you must dip into your retirement funds,
consider borrowing from the fund. Be aware that 401(k) loans must be paid back over a short term (generally five years) and will need to be fully repaid within 60 days if you leave your job.
The “least worst” option
If accruing debt to pay for tuition cannot be avoided, a home equity line of credit is the least punitive method from a financial standpoint. There are usually no closing costs, interest paid is potentially tax deductible, and interest accrues only on the amount withdrawn.
Use creative financing
Find a way to bring in extra income. Start an online business through eBay or Etsy, get a part-time job, work at the school for a tuition discount, or take fewer vacations. The sacrifices may be worth it to have your child in a private school environment.
