Brian Pon of Financial Connections Group, Inc., in Corte Madera, California, has a suggestion particularly for parents who will be around 59 years old while their children are in college. If they haven't fully funded their 401(k) or 403(b) plans, he suggests that they do so. Even though the money is taxed on withdrawal, theoretically, the parents will be in a lower tax bracket when it's time to pull out some of that money for college tuition. Roth IRAs work, too, since contributions may be withdrawn without penalty or tax for college expenses; earnings on the contributions may be tax free as well if the parents are over 59 1/2 and have had the account for at least five years.
Jim Holtzman of Legend Financial Advisors in Pittsburgh cautions, however, that while retirement funds aren't counted against a student on federal financial aid forms, schools using their own criteria may count those assets.