How can having a 401(k) help my child qualify for financial aid?
One commonly overlooked benefit of making the maximum annual contribution to a 401(k) retirement plan is that it can boost your child s chances of getting financial aid when it s time to go off to college. Increasing your 401(k) contributions to the maximum level might make it easier to qualify for financial aid because these balances are excluded from most college-aid calculations and reduce your taxable income at the same time. Earnings within such plans accumulate on a tax-deferred basis and may be borrowed under certain exacting standards for your children s education. Interest that you pay back to your account is not tax-deductible, but does accrue to your account balance. You should make sure your plan allows borrowing if you consider this alternative. Before you take this approach you should check out your plan s loan rules. Some plans don t allow loans, and some plans have very restrictive provisions that may invalidate this idea.
