Withdrawals for education purposes?

[Guest MattG]

What are the restrictions on withdrawing funds for education uses? I plan on investing $2k initially in a Roth and contributing about $1500 or more annually. My son is 9 years old. Thanks.

[Guest TJG]

Assets in a Roth IRA can be used for higher education expenses.

Note that you get your basis out first on a contributory Roth IRA, ie. no income taxes or penalty taxes up to the amount of your basis(contributions). If you exhaust your basis then you start working on your earnings and if you are younger than 59.5 then both income tax and 10% penalty tax would apply, however, if the disrtibution is for higher education expenses then the 10% penalty tax is waived.

[Guest MattG]

Thanks. So, beyond the $500 vs. $2000 limits, what are the differences between a Roth and Education IRA? Seems as if you would just go with the Roth given that you can contribute far more money into it than with the Education IRA.

[Guest TJG]

With an education ira qualified distributions are 100% tax free. Depending on your age, Roth disrtibutions for education expenses would be tax free up to your basis, but any earnings that were withdrawn would be subject to income tax.

Education ira assets can be rolled over to another child. See IRS Publication 970.

[Guest John R Grossmann]

Matt; Question, were you talking about a Roth for your child based upon the childs income, or using your own Roth for your childs education? Question for experts, can a parent use their Roth to help pay for the college costs of a child, grandchild or other relative?

[Guest John R Grossmann]

A few personal notes:

College finance articles and calculators seem more pointed towards frightening the parents. Often overlooked is that some college expenses are similiar to parental out of pocket costs while you child is in high school -- food, clothing, entertainment/travel. The significant new expense is tuition. For my parents, that translated to 1/2 of the total bill with summer jobs and my loan picking up the rest.

Early Roth Dispursements: It would be a shame to set up a beautiful Roth tax shelter only to tap it early. I would surely be very reluctant. The Roth value in the short term is OK, but over the long term is exceptional.

Most people are very poor at forecasting 5 yrs into the future, and worse 10+ yrs. Did anyone predict the Roth 5 years ago? Test yourself: job changes, promotions, inheritances, stock options, health issues. How accurate was your view (five yrs ago) of 1999. Americans tend to be too negative about their future. Investing for your kids education is a great idea but should not drive you crazy.

What about the parents who don't plan, don't invest, and spent it on cars/vacations/entertainment? Society punishes them by giving their kids scholarships.

[Guest MattG]

John, I was talking about using my Roth for my son's education.

[Kathy]

I suggest both an education IRA for the child and a Roth for the parents - the potential there is to sock away $4,500 a year, probably still not enough if your 9 year-old wants to go to private school - check out some of the calculators on the web- I did and I should be saving over $800 per month for my 9 year-old if I want him to go to private school and about the same for my 2 year-old - oh yea, right, like they don't want to eat now or wear clothes. Anyway, the $500 per year per child limit on the education IRA is a very small start. Problems with it relate to who controls the money when the child reaches 18 (or age of majority in your state), who decides to whom it gets rolled if the first child doesn't use it, etc.... The Roth gives us another avenue - we can take our own contributions out any time and our converted amounts after 5 years or for qualified education expenses for our children. If we have to tap into earnings, which I hope we won't, they'll only be subject to ordinary income tax. I'm also maxing out my 401(k) with an eye toward taking a loan from it if absolutely necessary. I sure wish my kids had some sort of athletic ability but no sign of that so far.