IRS. Many states offer state tax deductions on contributions to eligible state-sponsored 529 plans. ORIGINAL POST: 01/13/2015; UPDATED 6/9/2019. If you’re a savvy investor, you may not like the options you’re given. It’s your money! Contributions aren’t deductible on your federal taxes. As of the the time of publication, you can contribute to an education IRA, also known as a Coverdell Education Savings Account (ESA), if your modified adjusted gross income is $110,000 or less for single filers or $220,000 or less for joint filers. While money withdrawn from a Roth IRA is not taxable, money withdrawn from a traditional IRA is taxable at the ordinary income tax rate. Contributions to a Coverdell ESA may be used to pay for higher education expenses or education costs associated with an elementary or secondary school. Roth IRAs give you much more freedom and flexibility on how to invest your funds, whereas 529 plans often have limited options. So why would you choose a Roth IRA over a 529 plan for college savings? A 529 plan is a lot like a Roth IRA, but it’s designed for education expenses instead of retirement. But it was expanded to include up to $10,000 per beneficiary for K-12 education under the Tax Cuts and Jobs Act. A Roth IRA is meant for your retirement, hence the name "individual retirement account." Contributions to your state's 529 may deliver advantages on your state income taxes. When evaluating offers, please review the financial institution’s Terms and Conditions. Let's conquer your financial goals together...faster. Once you reach 59½ (and it's been at least five years since you first contributed to a Roth), all of your withdrawals—earnings as well as contributions—are tax-free. Your Roth IRA contributions are limited to $6,000 a year or $7,000 if you're 50 or older. All financial products, shopping products and services are presented without warranty. The value of a 529 college savings plan, whether it is owned by a dependent student or one of their parents, is considered a parental asset on the FAFSA. Self-Directed IRAs are a unique tool that allows you to invest in almost any type of asset with your IRA. That’s because withdrawals are counted as income, even though the money isn’t taxed. An eligible educational institution is any college, university or school that can participate in federal student aid programs. If you don't want your child to graduate buried by student loans, you'd better start saving early. In the 529 vs. Roth IRA contest, the Roth IRA often wins. Of the two different types of 529 plans, prepaid tuition plans have more restrictions but allow parents to lock-in tuition costs at a specific rate when opening the account. Which is best: 529 college savings plan or Roth IRA? Our opinions are our own. Here are four times it makes sense. Most assets, including 529 plans, are included in this calculation. There is no distribution requirement for 529 plans. Student Loan Limits: How Much Can You Get? But if you use the earnings for qualified education expenses, you'll avoid the 10% penalty, but not the income taxes, provided that the account is at least five years old. Then, use Roth withdrawals in their final two years of school, so the additional income won't affect their financial aid. One key exception: If you are fortunate enough to have wealthy family members, they can front-load the 529 by contributing five years of the gift-tax maximum at one time ($75,000 per person for each beneficiary/account) without paying gift taxes. A 529 plan is a lot like a Roth IRA, but it’s designed for education expenses instead of retirement. "Qualified Education Expenses." This is much lower than accounts that are considered the student’s assets, which are assessed at 20 percent. This is a great option when significant tuition increases are expected between opening your savings plan and your child going to college. It’s called hard money lending, and it is trending. The annual contribution is low, compared to what you can contribute to a 529. This may influence which products we write about and where and how the product appears on a page. You need to check plans carefully for good performance and fees. We want to hear from you and encourage a lively discussion among our users. Savings Plans for College: 529 Plans vs. Roth IRAs, 4 Smart 529 Plan Alternatives to Consider. If you're a parent, the prospect of paying for your child's college education may seem daunting. This ruling affects regular investors and self-directed IRA investors. The latest articles and tips to help parents stay on track with saving and paying for college, delivered to your inbox every week. A Roth IRA can be a smart place to stash that college cash for the following reasons: NerdWallet’s top picks for Roth IRA accounts: career counseling plus loan discounts with qualifying deposit, of free management with a qualifying deposit. According to IRS guidelines, qualified expenses include tuition, books, fees and room and board for students who are enrolled at least half-time. If you withdraw funds for purposes other than education expenses, you must pay regular income tax on earnings as well as a 10 percent tax penalty. Roth IRA contributions can be distributed at any age, and at any time, 100% tax and penalty free. Young investors—including teens—can really take advantage of a Roth IRA because they pay taxes now when they’re likely in a low tax bracket.
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