529 vs. Roth IRA

[gmj3307]

Our daughter is 2 years old.  We have $800 saved up for college and are able to put away $50 per month towards this.  We have a Roth IRA which will be "tappable" in her sophmore year of college since my husband will be 59 1/2 at that time.  We currently do not maximize the Roth.  Hopefully someday we can.

We make about 75K household income annually.  So we don' t have a lot of money to spread between different investments. 

Are we better off investing the $800+ college funds in my husband's Roth IRA (that has approx.$4500 in it) or are we better off starting a 529 just for her?

My gut feeling is to fund the Roth as the more money it has, the more it will make.  I realize that funding the Roth for college as well as retirement will have tax disadvantages.

Thoughts?

[Undecided]

Who knows what the FAFSA will do with your IRA in 17 years, but if it were me, I wouldn't put money into a 529 until I was maxed out on IRA contributions (I'll assume you have your reasons for preferring Roth IRA to traditional IRA), 401(k) contributions, etc. What are the tax disadvantages you are concerned about?

[the fixer]

What state are you in? I assume you get a state income tax break on your state's 529 plan. Can you choose low-ER investments in the plan?

Generally it mat be a good idea to save a little in both places, as a hedge in case your daughter ends up not needing as much money as you think for education (e.g. gets a nice scholarship or goes to a vocational school).

[msilenus]

Yeah.  529 accounts are counted for FAFSA applications now, but retirement accounts are not.  AFAIK, once your husband is eligible, you can take everything out of the Roth tax-free.  There might be gift tax concerns.  Gift taxes are assessed on 529s as the money trickles in, not as it pours out, which is more favorable to you.  It also leaves you with the ability to gift more money for non-qualified education expenses like transportation, if you want to do that.

Honestly, I'd still max out the Roth first.  It will hide the money from FAFSA (under today's law) and it's probably better for your kids to have you guys taken care of in retirement than for them to have their education expenses paid for in full.  Student loan debt is subsidized.  Parental support less so.  If you're giving enough to break the gift tax + education exclusion limit out of your Roth, you're might be giving too much.

Of course, all these laws can change a lot in 16 years.

[thepokercab]

it's probably better for your kids to have you guys taken care of in retirement than for them to have their education expenses paid for in full.

I'll second this.  I have two small children as well, but my focus needs to be on securing our financial future for the years to come. My parents weren't able to help me pay for college, short of the wad of cash my mom would stick in my pocket whenever I came home for break (and I always super appreciated it!). But by getting as many grants as I could, and working through college, I was able to graduate in 2006, relatively unscathed with only 10K in student loan debt.  I think Johnny Moneyseed had a good take on this: 

http://www.johnnymoneyseed.com/saving-money/kids-can-pay-for-their-own-damn-college/

The part that stood out to me, once you really think about the cost of tuition and inflation in the years ahead:

If you have about $500 saved and you contribute $50 every month to the account, you’ll have about $15,773 in 16 years (assuming 5% growth). For one child, this will help lessen the need for student loans, not significantly, but either way: you are helping. If you have more than one child and you’re saving $50/month for their college, it’ll be a drop in the bucket. You’ll have saved roughly 5% of their combined tuition costs.

Personally, i plan on raising my kids in a loving supporting environment, espousing the benefits of hard work.  Then when the time for college comes up, i'll make sure they know that there is nothing wrong with staying in state or going to community colleges, and since they're parents will be financially secure after years of saving, we'll be a foundation for other types of support that they'll need.  If they want to aim higher, more power to them and I support them 100%, but my wife and I won't be able or willing to pour a small fortune into their education.