Budget Tip: Don't Forget the Roth IRA When Planning for College

There are several good investment tools for saving for college.  Several of these plans have some definite tax advantages.   Many states offer tax deductions for 529 plans and the investment earnings for 529 plans and Coverdale accounts are tax free.  The Coverdale account can even be used to pay for private elementary and high school.  In the mix of savings plans available for college many people overlook one of the most obvious savings tools, the Roth IRA.

Most people only think of the Roth IRA as a retirement account, and that is its primary function.  Sadly, many families have to choose between college savings and retirement savings.  The advantage to the Roth IRA is that it allows for both, and in some scenarios can save parents money.  Since the Roth IRA is paid for with after tax dollars, the principle (amount out of pocket invested) can be withdrawn at any time for college with no penalty.  There are two benefits to using a Roth IRA for college savings.

• It allows a taxpayer to save above the amount allowed by other college plans and still take advantage of tax free earnings.  An individual can save up to $4,000.00 a year in a Roth IRA and not pay taxes on any earnings.

• It bypasses withdrawal penalties of college savings plans if the student earns sufficient scholarships to cover their college expenses.

If you use a plan like the 529 plans and your child does not need that money because of scholarships you have three options.  You can pass that money to a sibling or, if there is no sibling, use the money yourself to go back to school.  If neither of these options is available, you can withdraw the money with a 15% interest penalty.  With the amount of Interest earned over an eighteen year span that could be a lot of money.  If the savings is in a Roth IRA, that money can now be designated as retirement savings and nothing needs to be done because it is already in a tax advantaged retirement account.  If your child needs some of all of your principle for college, the interest earned can help you get caught up on retirement savings once your child's college expenses are paid for.

While not intended as a primary college savings vehicle, consider a Roth IRA as one of the tools you can use to save for your child college education.  Take full advantage of the benefit that the Roth can offer for your child, as well as the possible future benefits it may hold for you as well.

Is Debt Consolidation Right for You?

In an economic recession the excesses of consumer spending can be a burden to many people. Debts that were easily managed when a steady income was flowing in become overwhelming when a job is lost or income is cut.  As a result many people look to debt consolidation programs to make their economic burdens a little lighter.  For a debt consolidation program to be truly effective, there are several things that the consumer should know.

The most important thing to consider when looking at debt consolidation is the reputation of the debt consolidation company.  There are legitimate debt consolidation companies that work in the best interest of the consumer.  There are also those companies that charge large upfront fees and pass them off as the first debt payment.  There are several debt consolidation providers that are for profit companies that claim to represent non-profit companies when in fact they own the non-profit company.  The consumer must do research on the ethical behavior of any company that is considered for a debt consolidation program.

Debt consolidation does not elevate the responsibility for the incurred debt.  What debt consolidation does do is work to lower interest rates and lengthen the term (length of time to repay) of the debt to lower the monthly payment.  The idea is to free up income that is being put toward debt for other, more urgent, purposes.  For those who have suffered the loss of income due to job loss or wage reduction, the lowering of monthly debt payments could be the difference in being able to provide for the essentials or facing bankruptcy.  Before one considers debt consolidation as a means of simply lowering monthly debt payments, there are some things to consider.  Debt consolidation will have a negative impact on credit scores.  By entering into a debt consolidation agreement future creditors are given the message that the consumer has gotten into trouble before and it could happen again.  Furthermore, debt consolidation may increase the amount of money repaid to satisfy the debt.  Even if the interest rate is lowered, the length of time to repay the loan is extended so less of the monthly payment is being applied to the debt principle.

One thing debt consolidation does not address is the reason that the consumer is in the position to need such a program.  Debt is a symptom of a problem not the problem itself.  Many people who enter into debt consolidation programs end up deeper in debt because the do not close lines of credit or credit card accounts.  Any reputable debt consolidation company will counsel their clients in methods to eliminate the habits that led to their debt.

Debt consolidation, while a potentially useful tool, is not for everyone.  Before entering into any debt consolidation or elimination program a consumer must research the type of program to use, the company, the pros and cons of the program, and they must examine their own habits to determine why they are in the position to need the program.  For some the preferred course of action is to keep the present debt arrangement and find ways to add to the amount of principle paid.  For others debt consolidation could be the right answer to the problems they face.