Roth to 529 without penalties?

[Guest mku]

The following exception from 10% penalty applies to distributions from IRAs: Distributions equal to or less than your qualified higher education expenses.

If my minor child has a Roth IRA (from employment), could she get the full amount distributed to her and then contribute this entire amount to her 529 plan? Would such 529 contribution be a "qualified higher education expense"? Please point me to any support that says so (regs, pubs etc.)

Thank you,

[John G]

The list of allowed expenses is narrower than all expenses you might incur. A 529 is clearly not a direct college expense and I have never seen it on any list.

I am baffled by this question. Why would you want to flip from a Roth tax shelter to a 529? Can you please explain your reasoning?

[Guest mku]

Because this money is earmarked for education anyway, while (1) distribution from Roth is taxed (although w/o add'l penalty) and distribution from 529 is not; (2) Roth is charged multiple administration fees (b/c of its small balance), whereas 529 does not incur any fees in our case; & more.

The original reasoning for the possibility of this transfer came from the logic of the allowable cashout on Series EE bonds and simultaneous contribution to a 529 plan counting as qualified education expense.

[John G]

Only the earnings on a Roth would be taxed when withdrawn for an education purpose. Contributions would not get taxed. Since this is a recent account, and you indicated it was small, then I would expect most of the total is original contributions. (The original Roth contributions can always be withdrawn without any supporting reason and not get taxed.)

Second point - annual fees. There are many places where you can start a Roth or transfer a Roth and avoid annual fees. Last time I checked, Etrade would waive the fees if you elect email reporting systems. I was at Schwab yesterday asking about my daughters first job 401K and was told that Schwab now waives fees on any IRA/Roth over $3,500. I asked if this was due to general competitive pressures and the branch manager said "absolutely". Competition and the efficiency of internet transactions is driving down the cost of all fees and commissions. Those forces are just as powerful as genetics and evolution.

You did not indicate the dollar amounts of the two accounts or the general capabilities of the family to pay for education expenses. Perhaps you should leave the Roth as a long term tax shelter for your child and use the 529 for college expenses. Think of the Roth as part of your childs education about investing and planning for the future. That dinky fee should look pretty small compared to the first textbook you kid buys, and there are ways to shrink and reduce that fee.