Author Topic: Why not use Roth for college savings account?  (Read 10079 times)

Mom to 5

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Why not use Roth for college savings account?
« on: December 17, 2013, 08:51:02 AM »
I can't think of any reason not to. We are saving for retirement in husband's work plan (can do up to $35K) plus work contributes 10%. So, in deciding where to place funds for my kids' college, it seems Roth would make more sense. Also worth mentioning is we only have to pay 10% tuition for our kids to go to our state school. So, we would not need to plan for five full tuition rates.

Oldest child is sixth grade. He will likely select a major where pedigree matters, but the rest I think will be fine with state school.

matchewed

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Re: Why not use Roth for college savings account?
« Reply #1 on: December 17, 2013, 09:12:51 AM »
No reason why not from what I see, it is more flexible than a 529 plan.

avonlea

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Re: Why not use Roth for college savings account?
« Reply #2 on: December 17, 2013, 09:36:49 AM »
I think a lot of people base their decision on the 529 tax advantages offered by their state.  We get a 20% tax credit for up to $5,000 in yearly 529 contributions (max $1,000 state tax credit, per family not individual child).  That's a good guaranteed return. Does your state offer a nice tax break for 529s?

We are also maxing the Roth IRAs just in case, too.  What's great about a Roth IRA is that you have flexibility.  If there is money left in the 529 after all of your kids are done with college, you'll have to pay a penalty if you want to use it for some other type of expense.  Not so with the Roth.  And as far as the FAFSA rules go for now, retirement accounts are not counted in the calculation for federal aid.  529s are.  (I think some private schools do count retirement accounts in their aid calculations, but I'm not sure.)

I would also suggest looking into the rules on withdrawals for both Roth IRAs and 529s--contributions and earnings.

sol

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Re: Why not use Roth for college savings account?
« Reply #3 on: December 17, 2013, 09:45:30 AM »
I think the usual reason is that people are looking for as much tax-sheltered space as possible.  Using your Roth in place of your 529 means you give up the advantage of the 529, or lose the advantage of the the Roth.

If you're not already maxing your Roth (and 401k) then it probably doesn't matter.  For aggressive savers on middle incomes, you quickly run out of places to shelter your income.  And so want both a Roth and a 529.

Washington's education savings plan (GET) is a credit prepurchase deal, not an investment plan.  But many states offer 529 plans that are open to everyone regardless of residence.  Vanguard usually recommends Nevada's.

avonlea

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Re: Why not use Roth for college savings account?
« Reply #4 on: December 17, 2013, 10:52:10 AM »
If you're not already maxing your Roth (and 401k) then it probably doesn't matter.

Sorry.  I'm getting this thread a bit off-topic.

sol, I'm sure that you made sense to everyone else.  I can just be a little dense at times. :)  Based on previous threads, I know that both Mom to 5's family and my family are not maxing the 403b's and the 457b's.  Our husbands are contributing them, just not the max amount allowed.  We are setting aside a certain amount of savings outside of these accounts for college.   When you say "it probably doesn't matter", what do you mean?  Again, sorry if I seem obviously messed up here.

avonlea

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Re: Why not use Roth for college savings account?
« Reply #5 on: December 17, 2013, 12:58:38 PM »
Avonlea is correct in that we are not maxing work accounts as it is. I feel that the $35K plus 10% employer contribution would sufficiently fund retirement, so don't feel stressed about reserving a potential Roth all for us (for retirement).

My concern with going with 529s would be that we would lock money into a fund that may not be needed. In that light, I favor the flexibility of a Roth. Surely it is not uncommon (even here) to not be able to fully fund work retirement, plus two Roths (for married couple), plus 529s?

 So, I guess I'm wondering, would Roth "trump" a 529, if one had to choose? I think sol is saying it's likely a wash in a case like me where it cannot all be fully funded. :)

Gotcha.  Thanks!

mandies

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Re: Why not use Roth for college savings account?
« Reply #6 on: December 17, 2013, 03:23:32 PM »
In case this helps, we are opting to max our Roths instead of continuing to contribute to 529s. Our boys are 2 and 5.

NC took away after 2013 the ability to get tax credits for contributions. We did some thinking as well and we're just not sure how much they'll really need -- especially if they decide to go to trade school or get an Associate's etc, or get scholarships. I'd hate to "over-earmark" for college and then pay a 10% penalty on money that just could have gone to a Roth.

We opted instead to max out both of our Roth accounts each year, and if we have extra we may put it into a 529. More than likely we'll just put it in a cash account and pay the capital gains each year so we have more flexibility. However, we're living on one income, and I'm already putting away 15% pre-tax (my contribution+employer) to a 403b, and maxing our Roths is our new Mustachian 20 year plan.





avonlea

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Re: Why not use Roth for college savings account?
« Reply #7 on: December 17, 2013, 03:24:05 PM »
Avonlea is correct in that we are not maxing work accounts as it is. I feel that the $35K plus 10% employer contribution would sufficiently fund retirement, so don't feel stressed about reserving a potential Roth all for us (for retirement).

We are actually planning to use our Roth IRAs for retirement, but they are a nice "just in case" too.  The 403b and 457b are far from being fully funded b/c of this. :) I totally believe in YMMV when it comes to college and retirement savings, though.

avonlea

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Re: Why not use Roth for college savings account?
« Reply #8 on: December 17, 2013, 07:54:09 PM »
Okay, I just looked up a little info.  This is how I understand the process to work.  If I am wrong, PLEASE correct me.

When your child files his/her FAFSA in high school, the Roth IRA will not be counted into the calculation since it is considered retirement savings.  The 529 will be, but only a small amount, something like 5-6%. 

If you make withdrawals from a Roth IRA for college expenses, that $ amount will be counted as income the next time your child files his/her FAFSA.  I'm pretty sure that withdrawals on 529s are not counted as income.

So Roth IRAs are really only not taken into account for financial aid during the first year and then any years that you don't withdraw from them.

I was a little off on the whole FAFSA benefit, I guess. :( 

Have I confused you enough? lol

Worsted Skeins

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Re: Why not use Roth for college savings account?
« Reply #9 on: December 18, 2013, 05:48:21 AM »
We used Roths as part of our "just in case" savings strategy.  My son graduates from college in May--no debt and no Roth dipping.  This was in part accomplished through significant merit aid. 

As was previously noted, some private colleges (usually elite ones) put retirement accounts into the financial aid equation.  The highly invasive document that they use is called the CSS Profile.  FAFSA is a cake walk in comparison.

TrulyStashin

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Re: Why not use Roth for college savings account?
« Reply #10 on: December 18, 2013, 07:22:01 AM »
In 1990, we bought Florida's 529 Prepaid program for our daughter.  Four years of university tuition, one year of dorm, four years of fees.  Total monthly cost was less than $100.  She graduated HS in 2009 and did not go to college.  We waited a year to see if she'd change her mind.  Nope.

In 2010, we cashed out the Fl. 529 account and got a grand total of $14,800.00   Ain't that a kick in the pants?  If your kid doesn't use the 529, then all you get back is the cash you put in with no return whatsoever.  It burned for two reasons..... Four years of university for $14,800?!  Wow, what a value.   And also, we would have had far more money had we invested it in the stock market instead of the 529.

Fast forward . . . my son is a junior in HS and has Va's Prepaid 529 plan covering two years of university tuition.  I also hold an education IRA/ 529 for which he's the beneficiary.  It has about $8k in it (about $1,500 of which is gain).

He's not going to college either.  I may let his Prepaid plan ride for a while.  His four year hitch as a Navy enlisted man may change his mind about the value of college.  But the longer I sit on the Education IRA, the more it will cost me.  I'll have to pay capital gains on the gain and also a hefty penalty for withdrawing it.  It cannot be rolled over into any retirement account.

I have deep regrets about choosing 529 plans.  Kids simply are too unpredictable.

avonlea

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Re: Why not use Roth for college savings account?
« Reply #11 on: December 18, 2013, 07:50:48 AM »
Mom to 5, are you planning to help the kids with room and board (if they attend a state school that isn't in your town) or just with tuition?  If tuition is all that you and your husband plan to cover, then with the amazing discount that you have, I think a 529 might indeed prove to not be very beneficial.  You can't claim certain federal tax breaks if you are fully paying the costs with a 529. Parents that are relying on a 529 to cover the majority of their child's college costs are advised to cashflow the first few thousand dollars in expenses each year and then start taking out money from the 529 to cover the rest.  http://www.usnews.com/education/best-colleges/paying-for-college/articles/2012/08/01/4-costly-mistakes-parents-make-when-saving-for-college (Check out #3.)

Undecided

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Re: Why not use Roth for college savings account?
« Reply #12 on: December 18, 2013, 08:58:47 AM »
Okay, I just looked up a little info.  This is how I understand the process to work.  If I am wrong, PLEASE correct me.

You're describing a process that exists today, and may be different in 10 or15 years, and a process that is modified at the majority of selective colleges, so you may not want to build a whole strategy around it.

avonlea

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Re: Why not use Roth for college savings account?
« Reply #13 on: December 18, 2013, 09:21:22 AM »
Okay, I just looked up a little info.  This is how I understand the process to work.  If I am wrong, PLEASE correct me.

You're describing a process that exists today, and may be different in 10 or15 years, and a process that is modified at the majority of selective colleges, so you may not want to build a whole strategy around it.

I think it's best to build some kind of strategy.  But I agree with you that there's no guarantee that the way aid is calculated now will be the same down the road--and I already acknowledged that some private colleges don't follow the FAFSA model, not that I am encouraging my kids to go to one of those unless they can get a lot of aid.  But the possibility of rules changing is one of the reasons why we don't have all of our eggs in one basket.

Undecided

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Re: Why not use Roth for college savings account?
« Reply #14 on: December 18, 2013, 09:41:32 AM »
Okay, I just looked up a little info.  This is how I understand the process to work.  If I am wrong, PLEASE correct me.

You're describing a process that exists today, and may be different in 10 or15 years, and a process that is modified at the majority of selective colleges, so you may not want to build a whole strategy around it.

I think it's best to build some kind of strategy.  But I agree with you that there's no guarantee that the way aid is calculated now will be the same down the road--and I already acknowledged that some private colleges don't follow the FAFSA model, not that I am encouraging my kids to go to one of those unless they can get a lot of aid.  But the possibility of rules changing is one of the reasons why we don't have all of our eggs in one basket.

Emphasis added. Does that suggest optimizing for financial aid processes at those schools? Can that even be meaningfully influenced? Is that a relevant factor in actually considering, e.g., annuities?

avonlea

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Re: Why not use Roth for college savings account?
« Reply #15 on: December 18, 2013, 10:08:18 AM »
I think it's best to build some kind of strategy.  But I agree with you that there's no guarantee that the way aid is calculated now will be the same down the road--and I already acknowledged that some private colleges don't follow the FAFSA model, not that I am encouraging my kids to go to one of those unless they can get a lot of aid.  But the possibility of rules changing is one of the reasons why we don't have all of our eggs in one basket.

Emphasis added. Does that suggest optimizing for financial aid processes at those schools? Can that even be meaningfully influenced? Is that a relevant factor in actually considering, e.g., annuities?

Oh wow, no.  We are not optimizing our financial situation in order to have our kids attend an elite school.  We personally feel that we should save enough in their 529s to pay for the costs at a good state university.  If they can win scholarships to more elite schools or we are able to provide a little more funding for them, that would be great.  We'll see when we get there.  My husband works at a university which currently has a 50% discount for the children of staff and faculty for any school in that system.  So our plan is to have enough in the 529s to cover that discounted amount of tuition plus living expenses.  Will that tuition benefit still be there in 8 years when our son is old enough to start school?  We have no idea.  State funding of the university has gradually been declining.  We wonder if the perks that are afforded to him now will be there in the future.  Or what if he chooses to take a job somewhere outside of the university and loses the benefit that way? And what if one of our kids get an opportunity to attend a great school that will cost more than what we would have paid for a state school, but not a ton more?  Having the IRA is just a good safeguard for us. 

dadof4

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Re: Why not use Roth for college savings account?
« Reply #16 on: December 18, 2013, 02:23:53 PM »
Why should you prefer a 529 to a Roth IRA?

1. Education is not a qualified IRA distribution. Which means that you will need to pay taxes if your education bills exceed your contributions and dip in to your growth.
2. State income tax benefit. For Oregon, which has one of the highest state income tax in the country, it is like a free gift from the state.
3. Roth IRA is already maxed. For many people, it makes a lot of sense to max your Roth IRA even before you start thinking about your kids' education. Having BOTH a Roth and a 529 works well in those cases.



ETA: First point is wrong
« Last Edit: December 18, 2013, 03:12:42 PM by dadof4 »

msilenus

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Re: Why not use Roth for college savings account?
« Reply #17 on: December 18, 2013, 02:27:39 PM »

Education expenses are kosher for IRA withdrawals: http://www.irs.gov/publications/p970/ch09.html

dadof4

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Re: Why not use Roth for college savings account?
« Reply #18 on: December 18, 2013, 02:43:18 PM »
Education expenses are kosher for IRA withdrawals: http://www.irs.gov/publications/p970/ch09.html
Good catch! My information was probably dated.

avonlea

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Re: Why not use Roth for college savings account?
« Reply #19 on: December 18, 2013, 02:50:39 PM »
Education expenses are kosher for IRA withdrawals: http://www.irs.gov/publications/p970/ch09.html
Good catch! My information was probably dated.

Either way, I envy your ability to be concise, dadof4.  Not a gift I possess...obviously. :)

Indio

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Re: Why not use Roth for college savings account?
« Reply #20 on: December 25, 2013, 09:42:13 AM »
I set up Roths for my kids since they are employees of my business. Any work they do for me, i match the pay into their own Roth, not mine. My plan is that they take out loans, scholarships, aid,  etc for college. When they graduate, any debt they have can be repaid with the roth $. If they decide not to go to college, they have a retirement savings acct already in progress.

prestojx

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Re: Why not use Roth for college savings account?
« Reply #21 on: December 25, 2013, 12:54:17 PM »
Other advantages of 529 plans are the ability to front load them with five years of contributions - up to $70k ($140k for a couple) and the high annual contribution limits of $14k per spouse.

I got incredibly lucky and made the maximum contribution in early 2009. And even with a relatively conservative allocation, it has now more than doubled. On that investment record, I should start an investment newsletter or open a fund because I am such an investment genius!! - hahahaha!


TrulyStashin

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Re: Why not use Roth for college savings account?
« Reply #22 on: January 21, 2014, 01:50:42 PM »
In 1990, we bought Florida's 529 Prepaid program for our daughter.  Four years of university tuition, one year of dorm, four years of fees.  Total monthly cost was less than $100.  She graduated HS in 2009 and did not go to college.  We waited a year to see if she'd change her mind.  Nope.

In 2010, we cashed out the Fl. 529 account and got a grand total of $14,800.00   Ain't that a kick in the pants?  If your kid doesn't use the 529, then all you get back is the cash you put in with no return whatsoever.  It burned for two reasons..... Four years of university for $14,800?!  Wow, what a value.   And also, we would have had far more money had we invested it in the stock market instead of the 529.

Fast forward . . . my son is a junior in HS and has Va's Prepaid 529 plan covering two years of university tuition.  I also hold an education IRA/ 529 for which he's the beneficiary.  It has about $8k in it (about $1,500 of which is gain).

He's not going to college either.  I may let his Prepaid plan ride for a while.  His four year hitch as a Navy enlisted man may change his mind about the value of college.  But the longer I sit on the Education IRA, the more it will cost me.  I'll have to pay capital gains on the gain and also a hefty penalty for withdrawing it.  It cannot be rolled over into any retirement account.

I have deep regrets about choosing 529 plans.  Kids simply are too unpredictable.

Sorry it didn't work out for you, but I think it is important to point out that not all 529 plans are pre-paid tuition plans, and not all pre-paid tuition plans are 529s.

However, all 529 plans limit disbursements to only educational expenses.  Therefore they all carry the risk that if your child doesn't pursue higher education, you will be disadvantaged in recouping your investment.

If you're maxing out all other tax-advantaged avenues of saving for retirement, then by all means, add a 529 to your plan.  Otherwise, you're probably better off funding your retirement instead of your child's education.

MissPeach

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Re: Why not use Roth for college savings account?
« Reply #23 on: January 27, 2014, 01:27:34 PM »
I live in a state that doesn't offer any sort of discount for 529s. I also have no prepaid tuition options. I looked at a few states with good schools where we have family but as an out of state resident I can't open an account in these for the programs that are of interrest to me. So honestly I can't find a good reason in my situation to invest in a 529 - especially with the restrictions.

I also am over the roth investment threshold so I have book looking at opening a backdoor roth to fund college, retirement, etc.