Disclosure: Our content does not constitute financial advice. Speak to your financial advisor. We may earn money from companies reviewed. Learn more
Last Updated on: 25th December 2020, 05:28 am
Without an iota of doubt, paying for a college education is expensive, and only increasing exponentially. There has been much discourse as of late, regarding the astounding increase in tuition and fees at both private and public universities in the United States. A 529 Plan (also referred to as a qualified tuition plan) is a good option for paying for tuition. Yet, there are also advantages to paying for college with a Roth IRA under certain circumstances.
In this article, experts provide insight into which is the better method of paying for college tuition: a Roth IRA or a 529 plan?
Table of Contents
The 529 Plan Is A Better Option With A Big Exception
“Strictly speaking, if all of the money is sure to be used for education then the 529 is a better option.
There’s a big exception here though that can make the Roth IRA a better option.
529 distributions are tax-inefficient compared to a Roth if not used for education.
On the other hand, you can withdraw the money you contribute to a Roth at any time, for any reason, without paying taxes or penalties.
By saving in a Roth you can build a sizable amount that can be used for education, just through contributions. You can’t withdraw the earnings to pay for college, but they can grow and you can withdraw them tax-free in retirement.
This can be a big help due to the unknown path your child may take. If you choose an affordable school, 18 years of Roth contributions will go a long way to covering the costs.
What if they receive other money to pay for school or don’t go to college at all? If you’ve saved in a Roth, you simply keep the money for your own retirement.”
Open Up A Roth IRA For Your Child At An Early Age
“Opening up a Roth IRA for your child can give him the headstart he needs to get a leg up for retirement, fund his education, place a sizeable down payment on a home, or to use in an emergency.
When you start a Roth IRA at an early age, you take advantage of compound interest. If you put $100 each month starting at 15 years of age with an average 7% annual return, then you would end up with $600,276 by the age of retirement.
However, if your child didn't start contributing to a Roth IRA until they reached 30 years of age, they would only have $205,873. This is assuming they contribute the same $100 per month with a 7% annual return.
The power of compounding interest is just to good to pass up.
There are a couple of things to note when opening a Roth IRA for your child.
One: they have to have an income and it needs to be documented
Two: they can only contribute the amount they earn in that year
Opening up a Roth IRA can be one of the most powerful financial decisions you can make for your child.”
Marissa Sanders, Simple Money Mom
Make Sure Your Retirement Needs Are Adequately Covered
“There's a common saying in financial planning–you can always borrow for college but not for retirement. There's no doubt a lot of truth to that statement, and therefore, it's wise to make sure your retirement needs are adequately covered before committing to making withdrawals from your Roth IRA to pay for education expenses.
Yet, even if you're retirement needs are covered, there are a few other disadvantages to using a Roth IRA to pay for education. This includes contribution limits to 529 plans being higher than IRAs and the fact that
IRAs can only be used for qualified education expenses, which limits the
R.J. Weiss, CFP and Founder, The Ways to Wealth
You Can't Borrow For Retirement
“While there is technically no difference between the use of either plan in terms of tax, I always advise against doing this. The reasons are twofold:
First, it muddles up our brains by confusing our retirement with a perceived obligation to our kids. No matter how real or important a good education is, you can borrow for it.
You can't borrow for retirement.
Second, the only people I've ever heard push this position is people who sell Roths and who don't sell 529s.”
John C Brandy, Financial Consultant, Open Mind Generations
If the entirety of the money within a 529 plan will be used for education then that is the better option when paying for college tuition. That said, there are likewise advantages in having a Roth IRA for your child at an early age, given them a financial advantage and options once they reach the age of 18. Take into account the expert insight provided in this article, and always do your due diligence when choosing investment or retirement plans.