Parents are faced with the daunting task of figuring out the best way to tap the money they've saved for their kids' higher education. After all, they want to ensure they can stretch those hard-earned dollars as far as they can. Savings can be spread around in a variety of accounts, ranging from cash to stocks and in investments that are shielded from taxes and those that are not. While many parents get some financial relief via merit and need-based scholarships college students receive, as well as student loans, most have to fill in the payment gap with their own savings. Here's a guide for deciding what types of savings you should tap first to pay that big tuition bill:
College Payment Option Plan: If you have enough cash left over in your checkbook each month, see if the college has an interest-free monthly payment plan that allows you to spread part (or all) of your tuition payments over the full school year for a small fee. Cash still yields close to 0%, so you won't give up much in returns by pulling out of your savings or checking account.
529 College Savings Plan: Since 529 plans are filled with dollars specifically set aside for college — and the savings, gains and withdrawals have no tax consequences — this is the next bucket of money to pull from, personal finance pros say. Most 529 plans are invested in so-called "age-based" funds, which means the portfolio gets more conservative and is heavier on cash and bonds — rather than riskier stocks — by the time your son or daughter enters college. That means the 529 won't lose a lot of value even in the event of a stock market swoon. Also, don't drain your 529 savings in your child's freshman year, divide it up over four years to increase your chances of earning more on your money while it remains invested and giving you more payment flexibility in the future.
Cash Plan: College savings sitting in a bank account are worth tapping next. Using your cash also means you don't have to sell assets in other accounts, which gives them an opportunity to continue grow in value. Plus, there are no adverse tax consequences from using cash.
Stocks and Funds in Taxable Accounts Plan: Stocks or mutual funds in taxable accounts are the last assets you want to sell to raise cash for tuition. The reason is that any market gains will be subject to capital gains taxes, which will both boost your tax bill and potentially put you in a higher tax bracket. The tax hit also means less of your money can go toward paying your tuition bill.