Parents of College Students Tax Tip
Since I am soon to be the parent of a college student, I have been looking carefully at tax breaks for parents of college students. As I have written in previous blogs, there are 3 types of tax breaks you may qualify for. The Hope Credit, The Lifetime Learning Credit and thee Tuition and Fees Deduction. All 3 have income restrictions. Visit the IRS website for details on these tax breaks.
Also thinking about these tax breaks and their income ceilings made me think about another decision most parents are faced with — saving for retirement. How do these two things tie together? They tie together through your decision of whether to have a Traditional IRA , 401K or Roth IRA. Financial planners generally say you should participate in s 401k if your company matches some portion of your contribution. If they do not, they suggest a Roth IRA. Generally I agree with that.
However, if you have student in college, especially in the first 2 years where you may be able to take the Hope Credit, it make sense to me to still contribute to your 401k or Traditional IRA. This would only be true if your income is close to those ceilings and your contributions could make a difference in whether or not you qualify for the credit.
You either need to do some calculations yourself, or contact an Enrolled Agent or other tax professional who can look at your situation and help you determination which type of retirement savings is best for you, especially during your child’s college years.