ROTH as investment vehicle for kids college

[Guest simbarat]

I'm a new Dad looking for investment vehicles for my kids future college education.

I know about 529 plans and will heavely consider them. But apart from that...would opening a ROTH under my name or my spouses name be a good idea of saving for future education? I ask this since you can take out the contributions for anyreason without penalty (not the earnings though).

Therefore if I contribute $2000 a year towards a ROTH, by the time my daughter is around 20 and ready for college, I could (potentally) pull out $40000 for her education. Does this sound right.

Meanwhile, during that 20 year time period, my ROTH would have been growing (hopefully, depending on the investment I choose).

As a side advantage, if the college thing doesn't work out and she doesn't go, my wife and I have an added retirement vehicle to our already working 401K contribution efforts.

(i'm done blabbering) does this all sound right?

Seems like a flexable idea to me.

thanks in advance.

[BPickerCPA]

First of all, you can contribute $3,000 starting this year, income permitting. That amount is scheduled to increase in future years. Second of all, withdrawals of roth earnings for higher education costs will also be penalty free, but not income tax free.

I don't think it's proper for this forum to tell you if you SHOULD do it. Factually, you COULD do it. The decision is yours to make, either alone or in conjunction with your personal financial planner.

[John G]

Adding to Barry's comments:

You have some other options. These include just buying some stocks and holding them. When you go to sell you would be paying long term capital gains. Since you might not be able to hold a specific company without having mergers, dividends or other untidy events for two decades, you could purchase a tax managed mutual fund or a broad index fund like the S&P500 which would minimize taxable events. Another option is the educational Roth which while improved just isn't big enough for the complete job. The 529 plans have a much bigger capacity. Many states offer prepaid tuition plans - I personally don't like the ones I have seen since they are often not flexible enough and the fine print says the promised returns are not guarenteed.

If you do absolutely nothing for your child and spend the money on yourself, then you make it more likely for your child to get a scholarship! Sad, but true. Families that don't plan ahead get more financial support.

If you put any money in your childs name, you run some risk of the child becoming of legal age (18 or 21, varies by state) and spending the money on questionable pleasures.

Next year I have 2 kids in college: one ivy, one big U with out-of-state tuition. I recommend that when your kids are freshman in high school you start talking up the benefits of your local university! And, if the quality does not measure up try moving to Virginia (where UVa and William and Mary are outstanding in-state tuition schools) or Michigan (U of Mich). Another interesting option right now is McGill University, a very elite school in Montreal, were the cost to attend is about 15k US$ due to the exchange rate with Canada.

Over the next 18 years you will no doubt see more options for meeting college expenses.

[Guest simbarat]

".... withdrawals of roth earnings for higher education costs will also be penalty free, but not income tax free. "

In the above case, wouldn't the ROTH have to be in my kids name (rather nthan mine) for the withdrawls to be penalty free???

[BPickerCPA]

No.