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Should you still save for college during the Covid-19 pandemic?

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Parents with children in kindergarten through college are bracing themselves for a tumultuous start to the school year.

As they look toward the higher education landscape today — and anticipate what it could be like years down the road, some parents may be wondering if saving for college is really worth it. 

A  survey by Fidelity Investments finds most parents with children age 18 and under are staying the course with their college savings plans.

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A lot of parents say they are concerned about the short-term implications of the coronavirus pandemic, said Melissa Ridolfi, Fidelity's vice president of retirement and college leadership. "But they're really keeping their focus on longer-term goals."   

In the survey, more than three-quarters (77%) of parents with children 18 and under said that they expected to maintain or increase their savings for college, 15% said they will not save this year and 9% said they will decrease savings, mostly due to Covid-19 concerns.

529 plan benefits for college savings

"Parents with younger children are still saving through 529 plans," said certified financial planner Louis Barajas of MGO Wealth Advisors, based in Newport Beach, California.

Despite changes in higher education and employment due to Covid-19, Barajas says he believes these tax-advantaged accounts are still among the best ways to put away funds for college.

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"The money is growing tax-deferred and then, if you use it for qualified expenses, it all ends up being tax-free," including capital gains, Bajaras said. That, he added, "is a wonderful tax benefit." 

Still, given record unemployment and the many competing needs for their dollars, some parents may have to dip into their 529 plans to help pay other expenses. One-third of those surveyed by Fidelity admitted "they may need to tap into their 529 plans because either they've lost a job or because of the pandemic," Ridolfi said. 

529 plans aren't just for college costs

Yet, just because parents have withdrawn money from 529 plans for non-college costs does not automatically mean they will have to pay income tax and penalties. According to the IRS, "qualified education expenses" that can be paid for with 529 plan funds include private or religious school tuition for students in kindergarten through 12th grade and apprenticeship programs, as well as up to $10,000 in qualified student loan payments. 

What's more, even if your child's college plans change, Barajas says parents should still consider keeping that money in a 529 savings account. "You can change that beneficiary," he said. "So if you've got a kid that's probably not doing so well or maybe decides doesn't want to go to college, you can move it to another child.

"You can use it yourself if you want to go back to college," he added. 

However, if you take a "non-qualified distribution" from a 529 plan, you will have to pay federal income tax and a 10% penalty.

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Tapping a Roth IRA to pay for college

Barajas suggests parents consider tapping certain retirement funds before draining 529 plan accounts. If withdrawals are managed wisely, Roth individual retirement accounts can be used not only for retirement income but college expenses and even emergency savings.

Contributions to a Roth IRA are yours to take out at any time without a penalty or income tax hit. If you withdraw earnings, you'll have to pay federal income tax on that amount, although the typical 10% penalty will be waived if the funds are used for "qualified higher education expenses.

"Let's say, you put in $30,000 in your Roth IRA," said Barajas. "Now you have $45,000 in there.

"As long as it has been there more than five years, I can pull out the full $30,000 to pay for college and not report any income, or taxable income on my tax return next year," he said. 

Let your spending help with your savings. There are a lot of rewards cards out there that actually give you cashback that you can put into your 529 account.
Melissa Ridolfi
vice president of retirement and college leadership at Fidelity Investments

However, Roth IRA withdrawals can have an impact on college financial aid.

"A tax-free return of contributions will count as untaxed income to the beneficiary, reducing eligibility for need-based aid by as much as half of the distribution amount," according to Mark Kantrowitz of SavingforCollege.com. Therefore, he says, Roth IRAs are not well designed to pay for college costs. 

Parents should not worry if they cannot make 529 plan contributions at this time, many financial advisors say. Just try not to tap those funds. Instead, ask friends and family members to contribute to a 529 account if they can. Ask them to send a monetary gift for the child that can be deposited into their existing 529 plan, Ridolfi said.

"Or, in some cases, let your spending help with your savings," she added. "There are a lot of rewards cards out there that actually give you cashback that you can put into your 529 account or your retirement."

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