Comments on: College Savings: Roth IRA, 529 Plan, or Coverdell?

By: Gerald

Gerald — Tue, 02 Feb 2010 17:31:31 +0000

I would go for a Roth IRA if you know what you are doing: A 529 is great but you are limited to a mutual fund. If you get a brokerage Roth IRA you can buy stocks with high dividend yield from let’s say: RSO at 18%, KCAP at 18%, GMR at 21% and FTR at 13% annual paid quarterly and with dividends reinvested the compounding effect is tremendous. It blows my mind, but my 10K from two years ago plus $100 a month is now $24K…get a 529 that beats me and I’ll be your slave for 24 hrs!

By: Evolution Of Wealth

Evolution Of Wealth — Wed, 14 Oct 2009 20:16:10 +0000

Dylan, you are right about Roth distributions from an IRS/tax standpoint. From a financial aid standpoint (i.e. filling out the forms) they actually add distributions from a retirement account to your income. If you withdrew the money lumpsum it would be sitting in some account and be treated as an asset.
There are definitely strategies of combining resources to help increase your financial aid. How about you leave the money in the Roth IRA to continue to grow. Your kid takes out loans and you take distributions from your Roth IRA (of contributions) to pay either the loan payments or some or all of the loan?

By: Dylan

Dylan — Tue, 13 Oct 2009 16:25:51 +0000

Roth distributions are only income to the extent that they exceed contributions. However, once distributed, they will be counted and assessed as assets in financial aid calculations. If you withdraw all your Roth contributions before you apply for financial aid, you will likely increase your expected family contribution thereby decreasing your potential aid.

When you combine resources such as 529/CESA, IRA distributions, tax credits, current income, financial aid, etc., you can plan when and from where to pay college expenses in an efficient way. The strategy may not look the same for each year.

The first year aid package may also set the stage for future years at the same school (i.e. gift vs. loan aid allocations).

By: Dave

Dave — Tue, 13 Oct 2009 16:10:12 +0000

@EOW, couldn’t you just withdraw all the Roth contributions the year before you apply for financial aid?

By: Evolution Of Wealth

Evolution Of Wealth — Tue, 13 Oct 2009 15:47:03 +0000

Mike, you’ve only got your point half right. Retirement accounts are excluded but distributions are treated as income. So it might help you in your freshman year but then could significantly hurt you going forward if you plan to withdraw from these accounts. Also doing a Roth IRA conversions while your kids are in college is going to boost your income significantly which could have a huge impact on financial aid.

So for Dave, that $90k or $100k that you are planning to withdraw from your Roth is going to be counted as income after you withdraw it. Have you looked at how that is going to affect your financial aid?

By: Dylan

Dylan — Tue, 13 Oct 2009 15:37:46 +0000

@ Dave – I don’t think the claim was that Roth IRA is not suited for college savings. He said it was not ideal.

There are lots of ways to save and pay for college, the best vehicle or combination of vehicles will vary from case to case.

Mike left out the traditional IRA which can be a useful tool for paying for college, especially for parents in a position to legitimately employ their children. Shifting income to fund the kid’s IRA with a tax deduction can save taxes and can improve financial aid.

By: Dave

Dave — Tue, 13 Oct 2009 15:18:53 +0000

I disagree with the notion that a Roth IRA is not suited for college savings for tax reasons. I am someone who puts $2500 a year into a Roth, and has the choice to put an additional $200 a month either in the Roth or into a 529 plan, and I go with the Roth. After 18 years, I will be able to withdraw $90K of contributions from the Roth tax free and without affecting financial aid. If I had used the 529 plan and made 9% a year, I would have $100K sheltered. If I needed to withdraw $100K from the Roth I would pay taxes on an extra $10K, or about $2500 a year. In the 15% bracket that is only $375 a year. However, since the $100K 529 counts as a parental asset, it would reduce financial aid eligibility by about $5500 each year. Combine this with the fact that the Roth can be used either for retirement or college and I don’t see the advantage of 529 accounts unless you are already maxing out the 401k and Roths.

To me, I would not be satisfied saving $200 a month for 18 years so I can pay for college for a nephew. I would much rather have put that money in my retirement and still have the choice of whether to withdraw the contributions (not be forced into it because of tax consequences).

By: Miranda

Miranda — Tue, 13 Oct 2009 14:43:28 +0000

I like the idea of a 529 plan. But I like plans from states that are more flexible, and will let you go wherever. Right now, Ohio’s plan is offering free money if you open a 529 account. Also, it’s a good idea to check the investment options. Some plans have mutual funds with high fees, while others offer low-cost index fund choices.

By: Mike

Mike — Tue, 13 Oct 2009 14:43:09 +0000

Good find. Thank you for sharing.

For any readers who just want the answer rather than reading the article:

Coverdell accounts and 529 plans count as assets of the parent (presuming the parent is the owner). Retirement accounts are specifically excluded from the calculation. So at least that’s one (minor) point in favor of the Roth!

By: Evolution Of Wealth

Evolution Of Wealth — Tue, 13 Oct 2009 14:24:30 +0000

Here’s a good article on it: http://www.finaid.org/savings/accountownership.phtml