There is a little-known secret for parents planning to send their children to college in the future: Some of the tax-saving moves you make now could hurt your student’s chances for getting financial aid later. 

The way the financial aid system treats different assets could have a dramatic impact on how you save. Retirement plans and IRAs don’t count for college aid purposes. You’re not expected to break into these accounts to pay for tuition.

Key Points 

The college aid formula requires 20 percent of the assets in your child’s name to be used for college costs. But the government –mandated formula only expects about 5.6 percent of the money in the parent’s name to be spent. So you’re better off keeping accounts in your own name, especially during the last two years of high school, which is generally when you’ll be asked to start providing tax returns.

Don’t assume you’re not eligible for assistance. With the high cost of college today, many schools now have programs available to relatively well-off families if they meet certain qualifications. For example, your child might be able to get a “merit award” based on high standardized test scores and superior grades.

Best Strategy 

If you expect to apply for financial aid, don’t hold back placing money in your own retirement plan in order to put away savings in a college account in your child’s name.

Contributions to retirement accounts are usually tax-deductible and the earnings are tax deferred until withdrawn. On top of these tax breaks, your family may also become eligible for more financial aid.

TIP: If you own your own business and your tax professional endorses it, consider hiring your college-aged child and offering a company-wide benefit of college money. What you do for one employee you must do for all so definitely work closely with you tax pro on this one. 

Remember – You can usually tap retirement accounts for college money. Many 401(k) plans allow loans to be taken. And thanks to a tax law that went into effect in 1998, you can generally withdraw a limited amount from your IRAs penalty-free to pay higher education costs for yourself, your children and grandchildren.

Talk with your CPA or tax professional to develop a long term plan that’s right for your family, your retirement planning and your college-aged child.

Good luck.