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Question for the Money Doctors

Question submitted on Feb 11, 2014.

Question

I am currently in process of finishing my personal tax return on an H&R Block program but held up because government has not updated some forms needed to complete return. I am self employed looking for a safe place to put some money aside to fund my child's college education starting fall of 2014. I understand that I can start a SEP IRA which appears to give me additional refund on federal and state level based on my current return. I am trying to complete FAFSA application and would like best advice of where to put money(SEP, 529 plan, etc.) to create best potential of receiving financial aid and being able to take money back from plan with least amount of tax penalization.

Answer

If you need the money that you have targeted to fund a SEP IRA to pay college tuition in six months, you do not want to put that money in a SEP IRA. Although a SEP contribution will provide a 2013 Federal (and varies by) state income tax deduction, the amount you withdraw in August 2014 will be included in your taxable income, along with a 10% penalty on your 2014 tax return (unless you are at least 59 1/2 years old). Retirement accounts are not included on the FAFSA application. Based on the limited details you provided regarding your personal financial affairs, and very short (six month) investment time horizon, it seems that you would not want to risk losing the tuition money by investing in a 529 plan that fluctuates with the market. Please consult with a CPA/PFS in your area (visit www.findacpapfs.org) who will be able to assess your full financial picture and provided you with more specific advice.


For additional information visit http://www.360financialliteracy.org/