educational savings with roths

[Guest Angie Horn]

My child is making a few thousand dollars a year modeling. We have a mutual fund for her and all the money she makes is for her college fund. SHould we put any additional moneys she makes in a roth ira instead?

[John G]

My view is that a Roth is a great idea. The earnings are sheltered. While you can take funds out for education, you may find other means of financing her college (scholarships, inheritance, Rotc, etc.) and keep these funds sheltered for a very long time.

Two downsides to consider: First, assets in a childs name can be misused when the kid becomes an adult. Drugs, fast cars, problem boyfriends... it happens but is not common. Second, assets in a childs name are currently counted more heavily in the financial need calculation then say your retirement account or home equity.

These cautions not withstanding, I thing a kid Roth makes a lot of sense. Good luck.

[This message has been edited by John G (edited 10-04-1999).]

[Guest I B Watchin]

Traditional IRA assets can be used without penalty for qualified higher education expenses. Not so with a Roth. See IRS Pub 590.

[Kathy]

I'm not sure I agree with I B Watchin. First of all, your own Roth IRA contributions can be withdrawn tax-free, penalty-free, whenever you want. Secondly, the earnings can be withdrawn penalty-free if you fall under one of the penalty exceptions under 72(t) - I think the exception for higher education applies to Roth IRAs too. You will have to pay ordinary income tax on the earnings but not the penalty.

[BPickerCPA]

Kathy is right. I B Watchin is wrong. The Roth can used for penalty free withdrawals for higher education.

[John G]

As you can see from the above, it takes about 20 minutes for a response that is in error (IB Watchin) to get corrected on this message board. Kathy and BP have done an excellant job on the accounting issues. I certainly appreciate the level of effort.