529 plans are a great education savings option, but for new parents, college is 18 years away. A Roth IRA may help you to mitigate your risk and pursue multiple goals.
Kevin Mahoney is the founder & CEO of Illumint, which offers fee-only financial guidance specifically for the millennial generation. For more info, check out illumintadvisors.com. You also can connect with Kevin on:
Hey everyone! I’m at Cardozo High School in Washington, D.C., today to talk a little bit about 529 plans, and one common scenario in which you may be better off taking a slightly different approach to education savings.
529 plans are a great education savings option. You may have heard already that they can qualify you for a state income tax deduction. But there are other advantages, too:
They’re easy to set up. You don’t need to pay a fee to some large financial corporation in order to start contributing.
Unlike some other college savings options, people aren’t prohibited from opening an account if their income exceeds a certain threshold. Plus, any of your friends and family can contribute, too!
You can use the funds tax free for education expenses ranging from kindergarten all the way to grad school. And you can use the funds for room and board -- not just tuition & fees.
For financial aid purposes, a 529 plan is considered a parent asset, not a child asset -- which means a smaller percentage of the account value factors into how a school calculates your financial aid package
Finally, you can change the beneficiary to another immediate or extended family member at any time if, for example, your oldest child doesn’t end up needing the funds.
This last advantage raises an important point. For new parents, college is 18 years away. How do you know that your child won’t receive a scholarship? Or that our education system won’t fundamentally change in some way?
Sure, if we all had unlimited income, there wouldn’t be much downside to funding a 529 plan. But given that we struggle to save for retirement already, it’s a little risky to set aside limited funds for a relative unknown. Here’s where you might think about education savings differently, and turn your attention to a Roth IRA.
Like a 529, Roth earnings also grow tax free. But unlike a 529, you can withdraw your contributions at any time and for any reason, without taxes or penalties. On top of that, there’s no penalty for withdrawing any *earnings* to pay for the same qualified education expenses. You’ll still owe some taxes, but you’ve gained the flexibility to use your investment for school and/or retirement.
Remember: a Roth IRA doesn’t need to fully replace a 529 plan if you’re set on saving for future education expenses (and there are reasons why it shouldn’t). But it’s an alternative that looks out for both your kids and you.
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