Roth IRAs for college education vs. 529 plans, Educational IRAs

[Guest logman]

I do not see many articles on the use of Roth IRAs as a savings vehicle for kid's college education. With Education IRAs and 529 plans, you are locked into using this money for one purpose only. What if your kid decides not to go to college or receives a full scholarship? What happens to that money? What do you do with it and how does the IRS penalize you?

In addition, the returns in the NYS 529 plan are dismal. I know you get tax break on state returns, but I question how good these 529 plans really are. Now you are not taxed on earnings, but that does not matter if the plan is losing value.

With a Roth IRA, you have more flexibility in that if all the money is not needed for college education, then this becomes additional retirement savings. I know you are taxed on earnings only when a withdrawal is made for higher education. This is a disadvantage.

I don't believe my kids would receive any financial aid.

I would welcome comments/suggestions.

[John G]

Education IRA - this used to be a joke because the contribution limits were $500/yr and even if you started at birth you could only amass funds to pay for about 1 year of education. Now with the $2,000 limit you have a better vehicle, at least in terms of the assets that you can build if you start early. Downsides: higher impact on child's financial need calculation, kid can access the funds upon becoming an adult.

State 529: there are many state plans and they vary from awful to decent, recent performance may just be a reflection of market conditions. Large amounts can be set aside. Some tax benefits. In some cases you can lock in cost. Downsides: they are complicated, you generally do not control the investments and often not even the asset allocation mix.

Financial aide: go to the Princeton web site and try their calculator for financial aide which takes about 5 minutes to fill out (no charge) and may give you a surprising result... before you make assumptions about your children's eligibility. Princeton is very expensive, but also has a huge endowment they use to support aide. My experience is that the more expensive the school, the more likely there are sources of financial aide. Second point, there are lots of small and modest scholarships from Target, Coke, various "lodges", local media, successful local citizens, etc. that do not have an income component. Try FastWeb and do a quick screening and you will often find 100 plus matches based upon interests (school newspaper, band, science), ethnic background, parents career area, etc. Even state universities are offering modest scholarships to kids with great grades to give them an incentive to bolster the student body.

For some parents, maintaining control over assets is a big issue. High income families can often produce a generation that is vague about motivation, easily distracted by drugs/alcohol, or living the "good life". I see it in our town and wonder what causes the moral compass of some kids to be so confused. Some savings plans basically turn control over to the kids when they turn either 18 or 21. Viper vs tuition is a tough choice for some. So... if you have any doubts about this, you may want to select a plan where the funds remain under your control.

Good luck.

PS: One girl in her second year, one filling out forms as a HS senior. I have served on a few scholarship committees and a thoughtful, cleanly prepared application with a well written essay will ussually make the first cut. That first pass often eliminates 90% of the applications due to incomplete materials (10-15%), no signature, boring essay, messy submissions, etc.

[Mary Kay Foss]

I still like the Section 529 plans. If you're unhappy with the investment performance, you're now able to roll the funds to another state's plan once a year. With that possibility hanging over the investment manager's head, I'm hoping the returns will improve.

They are better than the UTMA accounts especially because they don't belong to the child once they reach 18 or 21.

The parent's Roth wouldn't be considered the child's funds for financial aid purposes like an UTMA account would be. I practice in California where it's very difficult to put sizeable amounts into an IRA because of the gross income limitations.

[Guest larryw64]

Regarding the 529 plans, there are several operated by national banks that offer some more flexibility.

But, one question I have on the ROTH IRAs is: when taking money out for education, do you have to pay penalties when if you dip into the interest earned?

[Guest logman]

Yes, I believe you are correct. You only pay taxes on earnings.

[Guest Shelton]

Can assets from an UTMA or UGMA be transfeered to an Education Savings account? or disirbuted from the UTMA/UGMA and then contirbuted to the Education Savings Account and if so, what are the ramifications

[Mary Kay Foss]

At a seminar I attended the speaker said that UTMA and UGMA accounts cannot be transferred to a Section 529 plan. They were completed gifts when established. He went on to say that the UTMA/UGMA could INVEST in a Section 529 plan. I'm not sure how you do that but someone who offers Section 529 plans may have the answer.

[Appleby]

This website, and others state that an UTMA or UGMA account may be transferred to a 529 plan.

http://www.collegeillinois.com/en/faqs/faq...dimplations.htm

See the very bottom where they ask and answer

“Can I rollover my child's UGMA/UTMA account to College Illinois!?

To transfer UTMA/UGMA assets into a College Illinois! 529 prepaid tuition plan you must first liquidate the UTMA/UGMA. As the custodian, you may then use the cash proceeds to purchase a contract.”

[Guest simbarat]

Logman and all,

Using a ROTH for kids college I think is a great, overlooked idea. I'm doing it currently. Here is why:

Everything is flexable. Kid goes to college you take your contributions out and if you need too your gains also. Kid doesnt go to college....no biggie, you have extra retirement money. The only downfall to all this is when you take your gains out, you do have to pay taxes on that unlike the 529 deal. But for the flexability, I'm willing to make that sacrifice.

For example. Starting this year, if you contribute $3K every year the moment your kid is born. By the time they are 16 you will have 48K for college, JUST IN CONTRIBUTIONS. That you can take out free and clear anytime, you already paid taxes on it. Its your money, all of it, assuming you didn't go in the red over the course of 16 years with a poor investment choice. Meanwhile during that 16 year time span, you were acruing a gain, relative to your investment performance. Guess what, that gain is tax free in reitirement (sounds sort of like a feature in 529s doesn't it), cause remember its a ROTH.

My point: There is a close, overlooked parrallel between ROTHS and 529s when used for kids college

my .02c

[Appleby]

simbarat

Good points,

Don’t forget though that some 529 plans will permit contributions of up to $150,000 per year, or maybe even more in come cases