529 or Roth IRA?

[Anonymous]

I was talking to an acquaintance recently about college savings accounts and she mentioned that they had decided to funnel all their kids' college money into a Roth rather than 529 accounts because the Roth money doesn't get counted when the kids apply for financial aid, whereas the 529 money does.

Is anyone here doing this? On the surface, her argument made sense to me but it made me wonder why anyone would do a 529 in that case. Are their downsides to this plan that I'm missing? I know a little bit about Roths and a little about 529 accounts but I'm certainly far from an expert on either.

[Anonymous]

You can't take the Roth earnings out until retirement age which for me will be years after my kid needs it.

[Anonymous]

Anonymous wrote:You can't take the Roth earnings out until retirement age which for me will be years after my kid needs it.

Have the rules changed? I used money from a Roth account 4 years ago to help fund the down-payment on our house and we're far from retirement age.

[Anonymous]

You can take out the principal but not any earnings without penalty

[Anonymous]

*principle

[Anonymous]

So if I'll be 60 years old when my daughter starts college, the Roth option might actually make more sense. Is that correct?

[Anonymous]

There's always a chance the age could be raised but otherwise it doesn't sound like a bad plan...I imagine the most people have children much earlier than 42 which prevent the masses from doing this

[Anonymous]

You can withdraw contributions to your Roth for any reason without penalty. For earnings, there are more stringent rules. but if you've had the Roth for more than 5 years, you will not pay tax on the earnings or pay a penalty if you withdraw the money for college expenses, even if you are under age 59 1/2.

One thing wrong with the plan is that you are not using that money for your own retirement savings. So the money you are putting into your 401k, for example, might not be enough for when you retire.

[Anonymous]

Anonymous wrote:You can withdraw contributions to your Roth for any reason without penalty. For earnings, there are more stringent rules. but if you've had the Roth for more than 5 years, you will not pay tax on the earnings or pay a penalty if you withdraw the money for college expenses, even if you are under age 59 1/2.

One thing wrong with the plan is that you are not using that money for your own retirement savings. So the money you are putting into your 401k, for example, might not be enough for when you retire.

Our 401K plans are already very well-funded. In this example, contributions to a Roth would be in lieu of funds we would otherwise have contributed to a 529, so there would be no net impact on retirement savings, either way.

[Anonymous]

Anonymous wrote:You can't take the Roth earnings out until retirement age which for me will be years after my kid needs it.

This is not accurate. You can withdraw Roth IRA funds (including gains, not just principal) without penalty for qualified education expenses.

http://www.irs.gov/publications/p970/ch09.html

There is a legitimate school of thought that this is a far superior way to save for college than a 529. The only thing that may hold you back are contribution limits.

[Anonymous]

Also you get a tax benefit in some states which for us is almost a 10 per cent return right there.

[Anonymous]

Anonymous wrote:Also you get a tax benefit in some states which for us is almost a 10 per cent return right there.

Are you referring to a Roth or a 529?

[Anonymous]

What are the contribution limits?

[Anonymous]

Anonymous wrote:What are the contribution limits?

Sounds like it would be $5,000 a year if you contribute only to a Roth IRA, but the rules aren't entirely straightforward.

http://www.irs.gov/publications/p590/ch02.html#en_US_2012_publink1000230988