Roth IRA for College?

[Guest Hopeful-mom]

In the process of researching TAP529 accounts for college I came across an interesting opinion I read in the website Savingforcollege.com. The author encouraged diversification, but if one needed to choose between the 529 or a Roth IRA, the IRA might be a good way to go. To summarize, reasons would be: you can withdraw Roth contributions tax-free and without penalty; flexibility of using the IRA for college and/or retirement (529 is college only); the investor can choose the type of investment.

I have two children (ages 10 and 8) and not a lot to invest. I know I won't be able to cover all their expenses and that loans will be used, but I'd like to get something going. There are so many types of investments from which to choose, I find it paralyzing and I end up doing nothing. (My spouse and I each have 401ks through employment.)

Would anyone have any thoughts to share on this option? Also, I've reviewed so much literature I'm not sure if I read this, but can you only invest in Roth IRAs if you are earning income? What if one of use becomes unemployed?

Thank you, in advance, for any help you can provide.

[John G]

You kids can only have Roths in their names if they have earned income. As soon as they start snagging jobs they will be eligible.

You and your husband are eligible for your own Roths if you file a joint return and satisfy the income standard. Only one of you need to be earning income.

One of the advantages of the 529 approach is that you can get more money into the account. Some of these plans are very good, some pretty poor in terms of investment options, flexibility and expected returns. One of the advantage of the IRA is that retirement money often does not count as heavily in financial aid calculations.

You can reduce the cost of college by finding in-state schools that work for your kids. But, you might find a lot of financial support at extremely expensive private schools.... Princeton used to have a online calculator that could show you how much they expect you to contribute, and in some cases you would pay less than going to a local community college. I talk to a lot of HS kids about paying for college - the worse input they get often comes from their own family where the cost is used to discourage college selection.

The worse part of your post was the "wind up doing nothing" part. Sure there are lots of choices. Get moving. Set a deadline for making a decision - something like 30 days.

[Bird]

If you hold onto the Roth IRA for 5 years, then it appears that there would be no difference, tax-wise, between that and a 529. Both would be tax-free.

At the end of the day, the tax impact is probably not such a big deal anyway, unless you're really socking away a lot of money and making large gains...

Probably a much bigger factor is the impact on fincancial aid. I think the Roth IRA gets the edge there, as retirement plan assets are generally excluded from aid calculations. 529 plans are considered to be assets of the owner (typically the parent); I think that 6% or something like that is considered available for college, so this approach could cost you a little bit in aid.

[BPickerCPA]

People, you're missing an important component of Roth IRAs. Income from a Roth is NOT tax free if used for college tuition. It is only penalty free. You have to be over 59½ (or dead/disabled) to get income out of a Roth tax free. The only other exception for tax free income from a Roth is for first time home purchase.

[Guest Hopeful-mom]

Thank you all so much for your thoughts on this. Since I do not have a whole lot to invest I thought the Roth IRA would provide the most flexibility. I plan on not touching the income (or gains? Not sure of the financial lingo) until I'm at least 59 1/2; only the contributions. Based on some of your replies, I think I'm on the right track. I appreciate the time you all took to provide me with feedback. Now I'm off to surf onto Vanguard.com. Some of the other postings I read here recommended index funds, which made a lot of sense. Wish me luck!