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Dad died.
Dad was a successful contractor in a local real estate development firm. His hard work and grinding it out had helped him attained junior partner status. His income had allowed mom to stay at home and raise their two sons. Mom hadn’t gone to college and hadn’t been in the work force for 20 years. As dad was the business guy, he took care of the finances and had accumulated a good deal in his retirement account which Mom inherits. They had put away some money for college and it had paid for the first year of their sons’ tuition with a little left over. With what Dad had made, they could comfortably have taken care of the college costs based on his income and mom doing some part-time work from home. Because of some health problems, Dad didn’t have much life insurance. Mom, not knowing much about tax law and the college process, felt she has enough money in the retirement account so she pays for the full year’s tuition and room and board by taking a withdrawal from the inherited retirement account. She is living off of some of their savings and her part-time income. The next year passes and the second son starts college. Mom dips further into the retirement account to pay the two bills and give herself some personal income. She then talks to one of Dad’s friends and asks him to file her taxes for the last two years.
Ouch! Double Ouch!
Literally tens of thousands of dollars have flown away due to lack of information and not knowing the process.
Moms’ generosity and not knowing the process are going to cost big time. Taxes! She has to pay income tax on the money she took out and a 10% penalty because it is what is called a premature distribution. She doesn’t have the dollars to pay that, so she may have to further take money from the retirement account to pay the taxes and there are taxes on that too. Her personal retirement is at risk as she is taking significant money from the account to pay for things. All of this is somewhat needless. With the right counseling and information, Mom could have filed the FAFSA form where her inherited retirement account would not be in the calculation. Due to her now low income, her son would have received some aid, based on their needs. He had pretty good grades and would qualify for some merit aid as well as some minority scholarships due to his ethnicity. Because of the way that Mom took money out to pay for college, her income is now elevated and “need” aid is impacted. In this situation, they can go to the college financial aid office and appeal their situation. Literally tens of thousands of dollars have flown away due to lack of information and not knowing the process.
Action Time.
I work with families in various stages of the college process. The story above resembles a real life situation in the process of being worked out. I would like to keep you or someone you know out of that hole and help find some real solutions to your college path. Take a few minutes to look through our college prep website. After you have browsed around, let’s find a time to talk. I would look forward to hearing from you.
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