Author Topic: ROTH IRA for college  (Read 7496 times)

csuino

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ROTH IRA for college
« on: February 19, 2014, 07:09:25 PM »
Hello, I'm 16 and planning to set up a ROTH IRA with Vangaurd. The money is most likely going to be used to pay for college. My understanding is that a ROTH IRA is a place to hold investments. My question is, what investments would be best for my situation? Thanks

phred

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Re: ROTH IRA for college
« Reply #1 on: February 19, 2014, 08:42:36 PM »
On the slim chance that this is a serious question, A ROTH is a retirement account.  You need to be 59.5 years old to take any investment gain out of it, although you can take out what you put in earlier.

csuino

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Re: ROTH IRA for college
« Reply #2 on: February 19, 2014, 10:21:31 PM »
On the slim chance that this is a serious question, A ROTH is a retirement account.  You need to be 59.5 years old to take any investment gain out of it, although you can take out what you put in earlier.

This is a very serious question. Many people on this site have recommended this to me already, and there are many articles online that describe how setting up a ROTH IRA is a great idea for teenagers. Just do some research and you'll see for yourself. On the slim chance that you actually want to answer my question, I'd really appreciate it.

Nords

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Re: ROTH IRA for college
« Reply #3 on: February 19, 2014, 10:27:25 PM »
Hello, I'm 16 and planning to set up a ROTH IRA with Vangaurd. The money is most likely going to be used to pay for college. My understanding is that a ROTH IRA is a place to hold investments. My question is, what investments would be best for my situation? Thanks
If you're planning to use this money to pay for college in the next couple of years, then you should put your cash into CDs with a local credit union.

AlmstRtrd

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Re: ROTH IRA for college
« Reply #4 on: February 19, 2014, 10:53:02 PM »
I wouldn't be so quick to put money into CDs. We are in the process of getting our $ in place to finance our daughter's education and money in her name at a bank is considered a big strike against her when it comes to getting financial aid. I don't have the qualifications to answer your question about whether or not the Roth is a possible option. But I am impressed that you are 16 and thinking about how to finance your education! Hopefully you'll get your question answered here.

Cwadda

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Re: ROTH IRA for college
« Reply #5 on: February 19, 2014, 11:08:37 PM »
If you're planning on saving money for college, a Roth is probably not the way to go. A Roth is a retirement account for long-term investing, you're not going to want to take anything out of if for a while. You're going to want something shorter term, like CDs or a credit union with good interest percentages.

I'm in college now and my advice is the following:
1. Apply for financial aid
2. Apply for ANY scholarships you have even a remote chance of earning
3. Consider attending a state school. Private schools cost so, so much money for the same diploma.
4. Take AP or equivalent college credit classes to save thousands
5. When in college, consider taking summer classes.

Hope this helps!

AlmstRtrd

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Re: ROTH IRA for college
« Reply #6 on: February 19, 2014, 11:25:56 PM »
Cwadda's advice all looks good. One other option might be to open a 529 plan for yourself. My understanding is that colleges will only take 6% or 7% of that money per year but you could use more of it if you need it (you will!). But you might get points for being the shrewd kid who wanted  the college education so much that he acted like an adult and planned for it. A college financial planner could answer your question in two minutes but Cwadda's advice is also valuable because she has been in your shoes and she is spot on regarding the five points she makes.
« Last Edit: February 19, 2014, 11:30:24 PM by AlmstRtrd »

soccerluvof4

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Re: ROTH IRA for college
« Reply #7 on: February 20, 2014, 06:06:34 AM »
Cwadda's advice all looks good. One other option might be to open a 529 plan for yourself. My understanding is that colleges will only take 6% or 7% of that money per year but you could use more of it if you need it (you will!). But you might get points for being the shrewd kid who wanted  the college education so much that he acted like an adult and planned for it. A college financial planner could answer your question in two minutes but Cwadda's advice is also valuable because she has been in your shoes and she is spot on regarding the five points she makes.





I have never heard of the 5-6% rule. We have 529's on all our kids and as long as the money is used for anything that is pertained to college you can use the monies from the 529. 529 is the way to go but with your age just go with the conservative plan.  But I agree with Cwadda as well on the rest of his points list.

Gin1984

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Re: ROTH IRA for college
« Reply #8 on: February 20, 2014, 06:52:56 AM »
I wouldn't be so quick to put money into CDs. We are in the process of getting our $ in place to finance our daughter's education and money in her name at a bank is considered a big strike against her when it comes to getting financial aid. I don't have the qualifications to answer your question about whether or not the Roth is a possible option. But I am impressed that you are 16 and thinking about how to finance your education! Hopefully you'll get your question answered here.
Money in a Roth is not counted against you.  And, if you have the money in for 5 taxes years, you can pull out the gains for college.  This is an extremely good idea for a 16 year old, if they have income.

Gin1984

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Re: ROTH IRA for college
« Reply #9 on: February 20, 2014, 06:54:04 AM »
Cwadda's advice all looks good. One other option might be to open a 529 plan for yourself. My understanding is that colleges will only take 6% or 7% of that money per year but you could use more of it if you need it (you will!). But you might get points for being the shrewd kid who wanted  the college education so much that he acted like an adult and planned for it. A college financial planner could answer your question in two minutes but Cwadda's advice is also valuable because she has been in your shoes and she is spot on regarding the five points she makes.
No, the college will assume 50% of the money in the student's name is for college that year.  A Roth IRA is a wonderful idea for a college student. 

Cwadda

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Re: ROTH IRA for college
« Reply #10 on: February 20, 2014, 07:03:55 AM »
I forgot to mention, if you receive or have received any savings bonds, wait to redeem them while in college. You won't be taxed on them.

AlmstRtrd

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Re: ROTH IRA for college
« Reply #11 on: February 20, 2014, 07:14:12 AM »
You won't be taxed on the savings bonds as long as they are used to pay for qualified education expenses. There is an IRS form to fill out for this. Also, it's important to know the "doubling time" on the EE bonds. Look on the Treasury Direct site for more details about the doubling time frame. I have some that I bought between 1997 and 1999 that are only paying about 1% interest. I was going to start selling few of them a year but for these bonds then hit a "doubling point" at 17 years (after which they continue to pay a lousy rate of interest). Bonds bought later will double in value after 20 years. In other words, at 19 years and 11 months, they can be way below a 100% gain. As soon as the first day of the next month comes along, they get a big bump in value. It pays to know the details on this investment (as with all others).

Gin1984

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Re: ROTH IRA for college
« Reply #12 on: February 20, 2014, 07:16:17 AM »
Cwadda's advice all looks good. One other option might be to open a 529 plan for yourself. My understanding is that colleges will only take 6% or 7% of that money per year but you could use more of it if you need it (you will!). But you might get points for being the shrewd kid who wanted  the college education so much that he acted like an adult and planned for it. A college financial planner could answer your question in two minutes but Cwadda's advice is also valuable because she has been in your shoes and she is spot on regarding the five points she makes.

There is very little benefit for a student to own 529, I know because I had one.  Unless you are in a state that has a tax deduction, the 529 has little to no benefit for a low paid student.  You can get the same benefit with the Roth, if you open it up and fund for the 2013 year, and not have it count against you for financial aid.  By 2018 the earning will be able to be removed for college. 
The 6% comes from the amount the college counts the PARENT'S assets against the student, the person who normally owns the 529.   



I have never heard of the 5-6% rule. We have 529's on all our kids and as long as the money is used for anything that is pertained to college you can use the monies from the 529. 529 is the way to go but with your age just go with the conservative plan.  But I agree with Cwadda as well on the rest of his points list.

phred

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Re: ROTH IRA for college
« Reply #13 on: February 20, 2014, 07:25:15 AM »
OK, learn something every day.  A ROTH can be used for educational expenses without the early withdrawal penalty.  You would still need to pay any income taxes on any potential gain.  However, since you're 16 now, I'm guessing college starts at 18?  Two years is not enough time for much of a gain unless you can pick stocks better than Buffet.
  Usually, when ROTH is mentioned as great for teens, people are saying it has all that time to grow and compound until the teen is 65

Gin1984

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Re: ROTH IRA for college
« Reply #14 on: February 20, 2014, 07:29:16 AM »
OK, learn something every day.  A ROTH can be used for educational expenses without the early withdrawal penalty.  You would still need to pay any income taxes on any potential gain.  However, since you're 16 now, I'm guessing college starts at 18?  Two years is not enough time for much of a gain unless you can pick stocks better than Buffet.
  Usually, when ROTH is mentioned as great for teens, people are saying it has all that time to grow and compound until the teen is 65
Not if the OP waits till five tax years.  Then it is both tax and penalty free, just as if the OP removed the money for first time house ($10,000 of gains).  Yes, the OP should be just sticking it in a high yield savings (or CDs) for college with the time horizon, but the gains still can be tax free.

skunkfunk

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Re: ROTH IRA for college
« Reply #15 on: February 20, 2014, 07:52:32 AM »
If his income is low enough, will he even have to pay taxes if it's in a regular vanguard account?

Gin1984

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Re: ROTH IRA for college
« Reply #16 on: February 20, 2014, 09:52:16 AM »
If his income is low enough, will he even have to pay taxes if it's in a regular vanguard account?
Maybe not, but the OP's savings will count against his/her financial aid and your first year is often the best year for financial aid.

phred

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Re: ROTH IRA for college
« Reply #17 on: February 20, 2014, 01:17:12 PM »
"Not if the OP waits till five tax years."
I thought about that, but in 5 years he should be mostly done with the undergrad degree.  Plus, the waiting would tie up the money for five years, and it may be needed sooner.

If you do spring money out of your IRA as a Qualified Exemption, I believe you forfeit the right to use any other Education Tax Credits

Gin1984

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Re: ROTH IRA for college
« Reply #18 on: February 20, 2014, 05:14:36 PM »
"Not if the OP waits till five tax years."
I thought about that, but in 5 years he should be mostly done with the undergrad degree.  Plus, the waiting would tie up the money for five years, and it may be needed sooner.

If you do spring money out of your IRA as a Qualified Exemption, I believe you forfeit the right to use any other Education Tax Credits
If you are claimed as dependent, you don't get educational credits anyway.  But, given that he is 16, that is at least 1.5 of high school and three more years of college.  He only needs five tax years (so if he deposits for 2013, he has until 2018, four years from now).  I doubt he will be able to pay for all of college from this, but it is better than having it all taken the first year.

phred

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Re: ROTH IRA for college
« Reply #19 on: February 20, 2014, 05:22:01 PM »
Once in 11th grade he should be able to earn two years of college for free from the high school/community college dual enrollment program.  So, much earlier than 2018.
  Over the summers he could be studying for the CLEP exams

Beridian

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Re: ROTH IRA for college
« Reply #20 on: February 20, 2014, 05:46:07 PM »
In my opinion the only reason to a use a 529 plan over a Roth IRA for college savings would be if you already have the Roth maxed out.  The Roth gets you the advantages and allows much more flexibility.  The 529 plans have a lot of restrictions.

abhe8

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Re: ROTH IRA for college
« Reply #21 on: February 20, 2014, 07:10:49 PM »
In my opinion the only reason to a use a 529 plan over a Roth IRA for college savings would be if you already have the Roth maxed out.  The Roth gets you the advantages and allows much more flexibility.  The 529 plans have a lot of restrictions.

but you must have earned income to have a roth IRA, right? i'm thinking of starting 529s for my kids, bc my state will match the first 500 per child. i'm not sure how I could open a roth for them?

Gin1984

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Re: ROTH IRA for college
« Reply #22 on: February 20, 2014, 08:01:05 PM »
In my opinion the only reason to a use a 529 plan over a Roth IRA for college savings would be if you already have the Roth maxed out.  The Roth gets you the advantages and allows much more flexibility.  The 529 plans have a lot of restrictions.

but you must have earned income to have a roth IRA, right? i'm thinking of starting 529s for my kids, bc my state will match the first 500 per child. i'm not sure how I could open a roth for them?
Yes, you must have earned income.  And states that have benefits to a 529 benefits parents.  It is only when you have a working student, starting at 15-16, that the Roth can be very useful for college, or non-traditional student. 
I know some parents who instead of funding a 529 (because our state does not have a benefit) are maxing out a 401k for themselves and funding their Roth IRA for their children's college fund. 

phred

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Re: ROTH IRA for college
« Reply #23 on: February 21, 2014, 01:10:42 PM »
a wage-earners Roth can be used for their childrens' education; it is one of the qualified exemptions.

During the last crash some 529s lost money; didn't provide for much education