Roth or 529 for college?

[Anonymous]

I realize I’m in the minority, but I’m not sold on a 529 to fund college, and I’m wondering if it’s really a better deal than a Roth in our situation. We have one kid so just one shot at the 529. DH and I will turn 59.5 in her third year of college, assuming she goes to college directly after high school, so could use the Roth to pay for her last years of college penalty free (and I think the first years of contributed income minus earnings before we turn 59.5). If we don’t use it, we can bank it for retirement. Why do most parents use a 529 instead of other more flexible vehicles? Are the tax benefits that much better to outweigh the lack of flexibility? What are we missing? We live in MD. Thanks.

[Anonymous]

Anonymous wrote:I realize I’m in the minority, but I’m not sold on a 529 to fund college, and I’m wondering if it’s really a better deal than a Roth in our situation. We have one kid so just one shot at the 529. DH and I will turn 59.5 in her third year of college, assuming she goes to college directly after high school, so could use the Roth to pay for her last years of college penalty free (and I think the first years of contributed income minus earnings before we turn 59.5). If we don’t use it, we can bank it for retirement. Why do most parents use a 529 instead of other more flexible vehicles? Are the tax benefits that much better to outweigh the lack of flexibility? What are we missing? We live in MD. Thanks.

529s lack some flexibility and Maryland has low deduction compared to other states. I lived in a state (Missouri) that has a high deduction limit 16K for married couples filing jointly, on *any* 529 plan. Maryland has a measly $2500 (probably 5K deduction filing jointly) for a Maryland plan. So, no, tax deduction wouldn't be an incentive.

The real incentive for us is income limits- there are no income limits to open a 529 and the contribution ceiling (30K for a married couple filing jointly) is much higher than a Roth, before you have to deduct from lifetime gift tax. Other family members might be able to contribute as well in a tight year (we don't have any rich family but I'm sure someone does). The drawback of course is that we would owe taxes on the earnings if DC didn't attend college- no 59.5 age limit for that.

I hope I got all of that right.

[Anonymous]

Anonymous wrote:

Anonymous wrote:I realize I’m in the minority, but I’m not sold on a 529 to fund college, and I’m wondering if it’s really a better deal than a Roth in our situation. We have one kid so just one shot at the 529. DH and I will turn 59.5 in her third year of college, assuming she goes to college directly after high school, so could use the Roth to pay for her last years of college penalty free (and I think the first years of contributed income minus earnings before we turn 59.5). If we don’t use it, we can bank it for retirement. Why do most parents use a 529 instead of other more flexible vehicles? Are the tax benefits that much better to outweigh the lack of flexibility? What are we missing? We live in MD. Thanks.

529s lack some flexibility and Maryland has low deduction compared to other states. I lived in a state (Missouri) that has a high deduction limit 16K for married couples filing jointly, on *any* 529 plan. Maryland has a measly $2500 (probably 5K deduction filing jointly) for a Maryland plan. So, no, tax deduction wouldn't be an incentive.

The real incentive for us is income limits- there are no income limits to open a 529 and the contribution ceiling (30K for a married couple filing jointly) is much higher than a Roth, before you have to deduct from lifetime gift tax. Other family members might be able to contribute as well in a tight year (we don't have any rich family but I'm sure someone does). The drawback of course is that we would owe taxes on the earnings if DC didn't attend college- no 59.5 age limit for that.

I hope I got all of that right.

also, no, we're not wealthy, but we have one kid and make too much for a Roth. If that's likely to happen to you, (income goes up and you can't contribute anymore- more money is a good thing right?) then your college savings plan may need re-structuring.

[Anonymous]

We do Roths over 529s. But we live in a no-deduction state where there's not a huge benefit to doing 529s. If I lived where it was pre-tax, I'd do enough to take advantage of that and then move to Roths (assuming pre-tax retirement is already maxed--we do that before any of this).

[Anonymous]

Anonymous wrote:I realize I’m in the minority, but I’m not sold on a 529 to fund college, and I’m wondering if it’s really a better deal than a Roth in our situation. We have one kid so just one shot at the 529. DH and I will turn 59.5 in her third year of college, assuming she goes to college directly after high school, so could use the Roth to pay for her last years of college penalty free (and I think the first years of contributed income minus earnings before we turn 59.5). If we don’t use it, we can bank it for retirement. Why do most parents use a 529 instead of other more flexible vehicles? Are the tax benefits that much better to outweigh the lack of flexibility? What are we missing? We live in MD. Thanks.

Most parents won't hit 59 1/2 while our kids are in college, so the Roth is not a real option. I was the same age your husband was when our respective kids were born; we still use the 529 because I want the Roth money and its attendant flexibility available for retirement.

The Roth features are so valuable for very-far-off planning, you really don't want that money going anywhere else if there is any issue of scarcity.

[Anonymous]

Anonymous wrote:

Anonymous wrote:I realize I’m in the minority, but I’m not sold on a 529 to fund college, and I’m wondering if it’s really a better deal than a Roth in our situation. We have one kid so just one shot at the 529. DH and I will turn 59.5 in her third year of college, assuming she goes to college directly after high school, so could use the Roth to pay for her last years of college penalty free (and I think the first years of contributed income minus earnings before we turn 59.5). If we don’t use it, we can bank it for retirement. Why do most parents use a 529 instead of other more flexible vehicles? Are the tax benefits that much better to outweigh the lack of flexibility? What are we missing? We live in MD. Thanks.

Most parents won't hit 59 1/2 while our kids are in college, so the Roth is not a real option. I was the same age your husband was when our respective kids were born; we still use the 529 because I want the Roth money and its attendant flexibility available for retirement.

The Roth features are so valuable for very-far-off planning, you really don't want that money going anywhere else if there is any issue of scarcity.

Educational expenses are penalty-free withdrawals from Roths (and from 401Ks) even if you aren't 59.5 yet. The other big benefit to Roths is that they aren't considered in financial aid assessments.

[Anonymous]

OP, for a lot of families it's simply that it doesn't makes sense for this to be an 'either/or' situation. We contribute to a Roth IRA, with the remote possibility in mind that we could use some of it for college expenses. But there is no way in hell that our Roth contributions would cover as much college expense as we need, so we also save aggressively in a 529.

Parenthetically, though, I believe Roth IRAs can be inherited by kids with no tax implications, so a family with a hefty 401k and adequate college savings elsewhere might prioritize a Roth as vehicle for passing down wealth.

[Anonymous]

If you have to choose, then Roth for its flexibility. Also, it doesn't count against financial aid until you actually withdraw from it. 529s are factored in immediately. Also, if the money isn't spent, then the Roth is still there for your retirement, whereas the 529 remains locked away for future generations' education.

[Anonymous]

Both and more. We funded in state tuition and costs est in 529 and then saved in other vehicles, ROTH being one, to fund in case they went out of state or private.

As it turned out one is currently at an out of state public and one is as a private with a scholarship that costs about the same as the out of state public. Both are costing about $45k a year all in.

[Anonymous]

I assumed from OP's question that they were not in a position to do both, which is ideal.

But generally I'd do:
- Max retirement
- Then max pre-tax 529 deductions
- Then Roth

Exception might be states that allow for unlimited deductions to 529s--then I'd try to do some to 529 and some to Roth.

[Anonymous]

Can you still take tax deductions on contributions with the new tax rules? I'm not super knowledgeable about the rules but from what I did it seemed like very little was still eligible for itemized deductions. But maybe it's a different ball of wax from the things I was used to deducting and can't anymore, like donations and home office expenses?

[Anonymous]

*from what I read, not did.

[Anonymous]

Anonymous wrote:Can you still take tax deductions on contributions with the new tax rules? I'm not super knowledgeable about the rules but from what I did it seemed like very little was still eligible for itemized deductions. But maybe it's a different ball of wax from the things I was used to deducting and can't anymore, like donations and home office expenses?

Tax deductions for 529s are only at the state level--so they're not affected by the new tax law unless a state changed its own rules in response.

Donations are still deductible for federal taxes--it just may not matter if you don't have enough other deductions to make it worth itemizing now that the standard deduction is $24K and you can only include $10K in local/state taxes.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I realize I’m in the minority, but I’m not sold on a 529 to fund college, and I’m wondering if it’s really a better deal than a Roth in our situation. We have one kid so just one shot at the 529. DH and I will turn 59.5 in her third year of college, assuming she goes to college directly after high school, so could use the Roth to pay for her last years of college penalty free (and I think the first years of contributed income minus earnings before we turn 59.5). If we don’t use it, we can bank it for retirement. Why do most parents use a 529 instead of other more flexible vehicles? Are the tax benefits that much better to outweigh the lack of flexibility? What are we missing? We live in MD. Thanks.

Most parents won't hit 59 1/2 while our kids are in college, so the Roth is not a real option. I was the same age your husband was when our respective kids were born; we still use the 529 because I want the Roth money and its attendant flexibility available for retirement.

The Roth features are so valuable for very-far-off planning, you really don't want that money going anywhere else if there is any issue of scarcity.

Educational expenses are penalty-free withdrawals from Roths (and from 401Ks) even if you aren't 59.5 yet. The other big benefit to Roths is that they aren't considered in financial aid assessments.

I don’t think this is correct. I understand you can withdraw money from your IRA for education, but not from a Roth 401k.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I realize I’m in the minority, but I’m not sold on a 529 to fund college, and I’m wondering if it’s really a better deal than a Roth in our situation. We have one kid so just one shot at the 529. DH and I will turn 59.5 in her third year of college, assuming she goes to college directly after high school, so could use the Roth to pay for her last years of college penalty free (and I think the first years of contributed income minus earnings before we turn 59.5). If we don’t use it, we can bank it for retirement. Why do most parents use a 529 instead of other more flexible vehicles? Are the tax benefits that much better to outweigh the lack of flexibility? What are we missing? We live in MD. Thanks.

Most parents won't hit 59 1/2 while our kids are in college, so the Roth is not a real option. I was the same age your husband was when our respective kids were born; we still use the 529 because I want the Roth money and its attendant flexibility available for retirement.

The Roth features are so valuable for very-far-off planning, you really don't want that money going anywhere else if there is any issue of scarcity.

Educational expenses are penalty-free withdrawals from Roths (and from 401Ks) even if you aren't 59.5 yet. The other big benefit to Roths is that they aren't considered in financial aid assessments.

I don’t think this is correct. I understand you can withdraw money from your IRA for education, but not from a Roth 401k.

Yes, just for Roth IRAs. Roth 401(k)s are quite different (and also subject to different limits).