Roth IRA and college education

[Guest drkats]

Hello all,

I wanted to know about the possibility of tax free and unpenalized withdrawals from Roth IRA for child's education in the same manner as up to $10,000 can be withdrawn for the first time home buyers. Hope someone has some knowledge on this subject.

Thanx.

[papogi]

You can remove amounts that represent regular, yearly contributions without any tax or penalty. If you take out more than your contributions, and go into any earnings, then this would be a non-qualified distribution. You would pay income tax on any earnings. You would not pay the 10% penalty, however, since higher education is an exception that lets you bypass the penalty.

If your goal is to have a tax-free and penalty-free withdrawal, the only way is to remove only those amounts that represent your annual contributions. This means you have no possibility of growth. Sure, you have earnings in the meantime, but you can't get at them without paying the tax.

In most cases, there are better ways to save for college.

[Guest drkats]

Thank you for your reply.

I am assuming that by "better ways" of saving for child's education you mean the 529 fund. Please let me know if there are better alternatives than the 529.

[papogi]

You'll run into lots of opinions here, and specific details of your particular situation might dictate. In general, yes, the 529 plans are better. You get tax-free growth, the money is in your name, and you have a high contribution limit. Depending on Congress' actions in 2010, it's possible that earnings from 529 plans will become taxable. If your child will hit college after 2010, this is a risk to be aware of. The Coverdell ESA grows tax-free, has a $2000 annual contribution limit for 2002 (more respectable than the previous $500), and will more likely hold its tax-free withdrawal status. One drawback is that Coverdells are in your child's name. You lose control and usually reduce some chances for financial aid. Personally, I think most individuals should max out in the Coverdell first, then put any extra amounts available into a 529.