Welcome to Financially Savvy Fridays, a monthly series featuring some of my favorite parenting bloggers who also love to share smart money tips. This month’s topic is paying for college, so I’ll be focusing on something that I’ve been thinking a lot about over the past few months: setting up a college savings fund and the pros/cons of Roth IRA vs 529 plans.
It’s no secret that college is expensive, and the cost keeps rising. Even though our girls are still young, my husband and I want to start planning now so we can maximize their college savings. Plus, relatives have already been sending money earmarked for their college funds as birthday and Christmas gifts!
Two of the most common ways to save for college are with a 529 College Savings Plan or a Roth IRA. Both of these options allow you to earn significant interest on your investment (unlike if your money is just sitting in a bank savings account).
However there are benefits and drawbacks to both a Roth IRA vs 529 College Savings Plan, so it can get pretty confusing and stressful trying to figure out which is best for your family! I’ve been doing quite a bit of research lately and I’ve finally settled on which direction we’re going to go. But first, I’ll share some of the key points I considered when making that decision.
Roth IRA vs 529: Which is the better college savings plan for your family?
529 College Savings Plan
- Allow you to contribute a high amount (over $200,000 in most cases)
- No IRS penalty on withdrawals for qualified educational expenses (tuition, required textbooks, on-campus housing)
- Can be transferred to another child or relative and used for their qualifying education expenses if there is a balance remaining from original beneficiary
- Contributions are not tax-deductible
- Can count against your child when being considered for financial aid if they are the named beneficiary of the plan
- Some college-related expenses don’t qualify (housing expenses beyond the cost of on-campus housing, transportation, among others)
- Any withdrawals for non-qualifying expenses, including a remaining balance not used while child is in college, are subject to a penalty (generally 10%)
- College expenses are exempt from early-withdrawal penalties (so long as the account has been open for 5 years)
- Does not count as a child’s asset on the FASFA and will not negatively affect their financial aid consideration
- Funds not used for education can remain in the account as a retirement or savings fund and won’t be assessed a penalty for withdrawal so long as the account holder is over the age requirement of 59 1/2.
- Lower contribution caps ($5,500 per year or $6,500 per year if the contributor is over age 50)
- There are income limits for contributors: you can’t make more than $117,000 as a single-filer or $186,000 for married couples
- Even though there is no penalty on withdrawals for educational expenses, these withdrawals are subject to taxes (if you’re under 59 1/2 years of age)
If you’re planning to save for an expensive school, you might consider the 529 with it’s larger contribution amounts. If you’re worried about your child not needing all of their college savings or how their savings might affect financial aid, then an IRA could be the way to go.
Based on my personal experience with college, I’ve decided on a Roth IRA for my girls. I earned a good bit in scholarships (and I have no doubt my girls are capable of the same), so a 529 would not have been the best option for me. One of my scholarships paid for tuition, so what I was left responsible for were my living expenses, and a 529 would not have covered that. I would have very likely had a remaining balance in a 592 plan and lost money when I withdrew it later.
Even if you have an idea of what you want to do, I still recommend talking to a professional or the investment company that handles your retirement (that’s what they’re there for!) They can assess your personal financial situation and help determine what really is the best option when it comes to a Roth IRA vs 529 College Savings Plans.
Be sure to check out my other Financially Savvy Friday posts! The topic changes every month!
Disclaimer: I am not a financial professional, simply a mom who enjoys learning about finances and investments. This post is based on my own personal research and experience and should not be taken as professional financial advice.
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