IRA v. 529 for college savings?

[Anonymous]

IRA v. 529: Which makes most sense? What are the pros and cons of each?

Anyone have experience with the MD 529 plan? We are hoping to start saving a few hundred dollars per month for DC3. As we anticipate DC being an only child, the fact that the 529 can only be used for school expenses makes me nervous in the event that DC doesn't go to college. TIA!

[Anonymous]

You can withdraw the money from 529 if DC not go to college. There is a bit of a penalty but it is not much. Or redesignate it to another beneficiary - grandchild, etc.

[Anonymous]

I would do the prepaid tuition program.

To put the amount of $$$ in perspective, I think it costs like $800/mo for 5 years. So compare that avenue versus what you think you will have saved up if you put a few hundred/mo in an education savings account.

[Anonymous]

Here is a useful article. http://collegesavings.about.com/od/rothiras/ss/rothiras_2.htm
Roth IRA not covered by FAFSA, so if you are counting on financial aid, then IRA might be a good choice. But also note that you can withdraw only the contributions penalty-free, not the interest, so its use may be limited. If you want to save more than just contribution amount for college, then maybe switch to 529.

But don't forget to save for your own retirement. You really might want to max out your own retirement savings in the IRA before even considering setting aside money for your child's college. In general, I've read that the proper order of savings is emergency fund>401k>IRA>529. Once the higher level is maxed out, then move to the next level.

Also, fwiw, I've read some articles recently suggesting the prepaid tuition plans are not as beneficial as many people once thought they were. A basic 529 might be better. Here is one example. http://www.savingforcollege.com/articles/20100108-Does-your-states-prepaid-tuition-plan-make-sense read your plan language closely.

Good luck!

[Anonymous]

Thanks, PP, for this
emergency fund>401k>IRA>529

I've been wondering what order to do all this and wonder if others agree with that?

[Anonymous]

Anonymous wrote:Thanks, PP, for this
emergency fund>401k>IRA>529

I've been wondering what order to do all this and wonder if others agree with that?

+1
That is the commonly accepted order, with paying off credit card debt coming first of course.
Roth IRAs definitely seem to serve multiple functions and is what we chose over the 529, for the time being. For any "older parents" out there, I did the math and realized my husband will actually be 59.5 while our boys are still in college, so keep that in mind as far as which withdrawals you might be eligible for.