Roth for kids' college

[Stachetastic]

I've been reading up on college savings strategies and I think I've settled on Roth, but since my husband and I will not be 59.5 when the kids reach college age, that means we would only be able to withdraw our contributions, right?

Not sure that makes sense for us, but I like the flexibility of using the Roth for things other than education. I also like the idea of additional retirement funds if we need them. We've been putting money away since they were born, but it's just sitting in earmarked savings accounts and doing nothing. I've got analysis paralysis and it's time to make some decisions.

[boarder42]

i dont understand why any money has to be specifically ear marked for this.  maybe its b/c we'll have been FIREd for 13+ years by the time our first yet unborn child reaches college age, and i dont think college will look the same as it doesn now and i dont have any idea if my child will want to go or how smart they will be.  plus i'll likely make money in FIRE.  so maybe its just a thing people much later in life looking for FIRE worry about, but the 4% rule typically grows wealth endlessly so there are too many unknowns IMO to personally ear mark anything for this part of personal finance.

[teen persuasion]

I'm assuming the OP means Roth IRAs, and not Roth 401k, since you would not be able to withdraw from a 401k while employed.

If you are not currently contributing to IRAs, definitely add those vs savings accounts doing nothing.

I'm planning on reserving Roth IRA contributions for a Roth conversion ladder when we FIRE, as we have little in taxable accounts.

Under current FAFSA rules, any withdrawals from a Roth IRA are added to current AGI when calculating your EFC, increasing your EFC.  So withdrawals would be counterproductive until after Jan 1 of the student's sophomore year.  Rules change, though - things are much different for my DS4 this year vs DD1 in 2008, and I'm tracking changes for DS5 who will begin college in 2023. 

We've chosen to maximize our retirement contributions to a variety of accounts (HSA, trad, Roth) to hedge our bets, and do our best to maximize financial aid of all types: state/fed/institutional grants and scholarships, academic scholarships, loans, work study, student income, tax credits.  Sometimes good for one is bad for another, so we weigh the differences each year.  As college is immediate, and retirement is future, we tend to favor advantages for college now, and defer retirement options that become too costly when college aid is at stake (like Roth conversions).

[Mgmny]

Put the money in your CHILD'S roth. They can withdraw the contributions for education, PLUS they may get a good understanding of how money works.

This is how my parent's did it for me and my brother, and we are INFINITELY thank to them. This way, I understood that my college costs directly impacted my financial outlook. That way i didn't pick a school to put me 200k into debt.

There were risks however. If my brother and I were irresponsible, we could have withdrawn our Roth accounts, and paid huge penalties, and taken the money and ran. We didn't, fortunatly, so just be careful how you tell your children about the money (if they are irresponsible). They won't know it's theirs unless you tell them!

[boarder42]

Put the money in your CHILD'S roth. They can withdraw the contributions for education, PLUS they may get a good understanding of how money works.

This is how my parent's did it for me and my brother, and we are INFINITELY thank to them. This way, I understood that my college costs directly impacted my financial outlook. That way i didn't pick a school to put me 200k into debt.

There were risks however. If my brother and I were irresponsible, we could have withdrawn our Roth accounts, and paid huge penalties, and taken the money and ran. We didn't, fortunatly, so just be careful how you tell your children about the money (if they are irresponsible). They won't know it's theirs unless you tell them!

children have to have earned income to do this correct?

[GizmoTX]

Yes, each child has to have earned income equal to a contribution to a Roth IRA. Annual limit applies. We matched DS' earnings while he was a minor to contribute to his Roth.

[lthenderson]

Why not put the kids money in a 529 plan? They can access the money tax free and don't have to have an income to add to it unlike the requirements for a Roth in their name. That way you leave your Roth principle intact as an early retirement vehicle. You also can get a tax deduction for your contributions to the 529 plan.

[Stachetastic]

Yes, Roth IRA, I apologize for the confusion.


I'm not sold on the 529 for several reasons, but feel free to change my mind:

--529 counts as assets toward EFC, correct?
--One child has another set of parents who may or may not be contributing, we don't know
--We will encourage community college, tech schools, apprenticeships, etc.
--We do not have any other family members who will need college funding, aside from theoretical grandchildren
--We do not plan on returning to college ourselves in the future

[teen persuasion]

Yes, Roth IRA, I apologize for the confusion.


I'm not sold on the 529 for several reasons, but feel free to change my mind:

--529 counts as assets toward EFC, correct?
--One child has another set of parents who may or may not be contributing, we don't know
--We will encourage community college, tech schools, apprenticeships, etc.
--We do not have any other family members who will need college funding, aside from theoretical grandchildren
--We do not plan on returning to college ourselves in the future

Yes, 529s count as assets, but at a lower rate than income (which is where Roth withdrawals would land).  Assets are included at a 12% rate, vs 100% of income - then a rate of 22 to 47% is applied (progressive scale).  So assets have a max rate of 5.64%, vs max of 47% of income.

Edit to correct top rate to 47%.

[Mgmny]

Yes, each child has to have earned income equal to a contribution to a Roth IRA. Annual limit applies. We matched DS' earnings while he was a minor to contribute to his Roth.

Ahh. My parents got away with it because my brother and I were employees of my father's company. Makes sense.

[lthenderson]

I'm not sold on the 529 for several reasons, but feel free to change my mind:

--One child has another set of parents who may or may not be contributing, we don't know

I'm not sure why this matters if someone else is contributing to a 529 plan for your child. You can have multiple accounts per child.

--We will encourage community college, tech schools, apprenticeships, etc.

529 accounts can be used for all those things.

--We do not have any other family members who will need college funding, aside from theoretical grandchildren
--We do not plan on returning to college ourselves in the future

In both cases, you get all your principle back. You also get back 90% of all the earnings as well. You pay a 10% penalty on the earnings but probably lose a lot more in terms of lost potential by withdrawing retirement funds.

[Stachetastic]

You guys are awesome! You've got me convinced that 529 is the way to go. Thanks for taking the time to help me process everything.

[BTH7117]

You guys are awesome! You've got me convinced that 529 is the way to go. Thanks for taking the time to help me process everything.

One more thing: You do not have to use your state's 529 program or plan.  It is a good idea to shop around for ones that include low cost index fund options.  The caveat is that your state may offer state income tax deductions for contributions to your state's plan.  If you live in a high tax state that offers a deduction, it may be worth it despite mediocre fund options.

[nereo]

You guys are awesome! You've got me convinced that 529 is the way to go. Thanks for taking the time to help me process everything.

In addition to the 529 I'd also advocate for contributing to your children's ROTH IRAs as soon as they have earned income.  It isn't particularly hard for a teenager to earn $5500 over the course of a year (I did it first with a weekly paper-route when I was 12), and some job experience can be a great motivator for college.

[Stachetastic]

You guys are awesome! You've got me convinced that 529 is the way to go. Thanks for taking the time to help me process everything.

One more thing: You do not have to use your state's 529 program or plan.  It is a good idea to shop around for ones that include low cost index fund options.  The caveat is that your state may offer state income tax deductions for contributions to your state's plan.  If you live in a high tax state that offers a deduction, it may be worth it despite mediocre fund options.

Our state does offer deductions for 529 contributions, but I've never heard of Ohio being a high tax state.