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 Since the Roth IRA is paid for with after tax dollars, the principle (amount out of pocket invested) can be withdrawn at any time for college with no penalty.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.
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.
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 Since the Roth IRA is paid for with after tax dollars, the principle (amount out of pocket invested) can be withdrawn at any time for college with no penalty.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.
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