Thinking of investing in a ROTH IRA

[Guest hkolln]

We are thinking of investing in a Roth IRA for retirement and our daughters college education. She is 6. I'm wondering if this is a good investment and/or if there are any other types of savings tools out there that might benefit us more. I'm in my 30's and my husband is in his middle 20's. We don't currently invest in any type of 401K's at work or any other type of investment tools.

Can someone give me advice on this? Thanks!

[John G]

Lots of issues, I will try and give you some feedback on a few areas.

1. Kid - college: You may want to consider an education IRA that allows you to put $500 per year into a dedicated account for your kid. That is not enough to cover college costs (you can make perhaps 12 contributions or $6000 which would probably grow to about $12k at about 10%/yr), but it gets you started. Earnings are not taxed year to year, and dispursements come out tax free if used for college. There are also state investment plans and private plans (such as Fidelity or Etrade) that allow you to set aside more. These vary from good to crappy, problems include conservative investment constraints, weak returns and restrictions on how the funds can be used. Note, all options that put money in your childs name has a slight negative on qualifying for need based scholarships.

2. You - 401k: You need to fully understand your employers 401k or related investment options (ESOP, 403B, thrift plan, or whatever they might be called) because these plans often have a match component. As long as you have a reasonable set of investment options (hopefully something besides just company stock) this option might be your very first investment. You must do some research on your options... talk to the HR/personnel office.

3. Roth IRA: Assuming that you have the earned income (but not "too much" income to disqualify) the Roth is an excellant investment option. Current limit is $2,000 for you and your spouse each year. A solid tax shelter. And, no forced dispursement schedule. If you can set aside $4k in each of the next 34 years and have these investments grow at 10%, you will top the $1 million market in retirement. That means 136k in contributions grows to 1.08 million. It's not the same as 1M today, but that is still a nice nest egg. It helps to start early, so your timing is good. Note, 2K is the max annual amount, you can start out a lower levels.

The clock is ticking on making contributions for 2000 tax year, and you want to use 2000 and leave 2001 open for next year.

You may very well have additional questions, post again. I also try to respond to emails. Good luck.

[Guest Mary Ann]

John - that was a great resonse to the question. I am wondering, however, if anyone else is turned off by education IRA's? I believe I read that if funds are used from an education IRA in a year, then the education credits cannot be claimed in the same year. It seems to me that giving up the education credit is a bigger blow than any advantage that might be obtained from having funds grow as non-taxable in an education IRA (and that happens only if all the rules are followed).

Given the choice, contributing to a Roth IRA every year seems to me the best way to go to save for college.

Of course, none of the above matters if the income level of the taxpayer is too great to allow any of these plans.

[JAMES PATRICK]

Mary Ann,

I personally would recommend against an education IRA because of the loss of Hope, Lifetime Learning,etc. In New York we have a State Plan that allows tax deduction on income taxes of $5,000 for a single and $10,000 for a MFJ which is invested by TIIA-CREF for a minimal fee. I know some other states have similar plans which are far superior to ED IRA's.

[John G]

I was not aware of the interaction between Hope credit and education IRA. One way to minimize this is to try and take all of the withdrawals in one year.

Also worth noting on a related issue, some parents do not qualify for a hope (such as those working off 4 years of a large Roth conversion) but if their child is earning income and paying for the education... the child might qualify.