529 Accounts Vs. Roth IRA for College
With the cost of a college degree steadily increasing, parents are encouraged to start saving early for their child's future education expenses. There are a number of different savings vehicles available, including the Roth IRA and state-sponsored 529 plans. These two options offer parents distinct advantages but they may not be right for every situation. It's important to consider the pros and cons of each before making your investment choice.
Other People Are Reading
-
Eligibility
-
Roth IRAs and 529 plans have different guidelines regarding who is eligible to contribute to these types of accounts. As of 2010, the Internal Revenue Service (IRS) allows single filers with a modified gross adjusted income (MAGI) of less than $120,000 to contribute to a Roth IRA. Joint filers must have a MAGI of less than $177,000. Anyone may contribute to a 529 plan, regardless of income. You do not need to be a resident of a particular state to invest in its plan.
Contributions
-
The contribution limits vary for Roth IRAs and 529 plans. As of 2010, the maximum annual contribution for a Roth IRA was $5,000, or $6,000 if you are over age 50. Each state sets different limits on the maximum lifetime contribution to a 529 plan. Some states have contribution limits in excess of $300,000. Contributions to both Roth IRAs are not tax-deductible. As of 2011, 34 states offer a tax deduction for residents who contribute to a 529 plan.
-
Withdrawals
-
You may use withdrawals from a Roth IRA or a 529 plan to pay for qualified education expenses at an eligible educational institution. For IRS purposes, this is any college or university that is eligible to participate in federal student aid programs. Qualified education expenses include tuition, fees, books, supplies and room and board if the student is enrolled at least half-time. Withdrawals must be used for these expenses only in order to avoid a tax penalty.
Benefits
-
Contributions to both Roth IRAs and 529 plans are allowed to grow tax-free. If your child does not attend college, you can transfer your 529 plan to another beneficiary without incurring a tax penalty. You are not required to use 529 plan funds within a specific time frame. Withdrawals from a Roth IRA or a 529 plan are typically considered an asset of the parent, meaning they do not have a significant impact on your child's financial aid eligibility.
Considerations
-
If you withdraw funds from a 529 plan for any purpose other than higher education expenses, the distribution is subject to a 10 percent tax penalty. If your Roth IRA has been open for less than five years, withdrawals of earnings only are subject to regular income tax and a 10 percent tax penalty. Withdrawing funds from a Roth IRA for education can make it more difficult to achieve your own retirement goals.
-
References
- Photo Credit Cash image by Greg Carpenter from Fotolia.com
