A Roth IRA is a tax-advantaged retirement account that anyone with an earned income (up to a certain threshold) can contribute to. However, when you withdraw money from a Roth, you can actually use those withdrawals to pay for any expenses, including college expenses for a child or other beneficiary.
Many of the advantages that make a Roth IRA a great way to save for retirement make it an ideal way to save for college, too. Like the 529, there is no income tax deduction when you contribute to a Roth IRA. ... That means 100% of your withdrawals can go to college expenses.
Money held in retirement accounts, such as a traditional or Roth IRA, is an asset exempt from being evaluated on the FAFSA for financial aid. But funds withdrawn from an IRA account will count as income and may affect a student's financial aid two years after the withdrawal, financial advisors say.
You can't roll over your IRA into a 529 plan without taking a tax hit and, in some cases, paying a penalty, too. Better options include using an IRA distribution to pay for education expenses or funding a 529 with regular income. All 50 states offer 529 savings plans to help families save for higher education expenses.
The first five-year rule states that you must wait five years after your first contribution to a Roth IRA to withdraw your earnings tax free. The five-year period starts on the first day of the tax year for which you made a contribution to any Roth IRA, not necessarily the one you're withdrawing from.
In most cases, your 529 plan will have a minimal effect on the amount of aid you receive and will end up helping you more than hurting you. There are also several steps you can take to increase your child's eligibility for student financial aid.
Roth IRAs
Another 529 alternative to put away money for college and invest it for a potentially larger return is to utilize an account intended for retirement, such as a Roth IRA. Roth IRAs are individual retirement accounts that allow people to save and invest after-tax money.
True or false: I will lose the money if my child doesn't go to college or gets a scholarship and doesn't need all the money. False. You don't lose unused money in a 529 plan. ... You can withdraw the amount of any scholarship awards from your 529 without penalty; federal and state income taxes on the earnings still apply.
It's hard to find a perfect savings vehicle. But saving money imperfectly is still much better than not saving at all. On the one hand, 529 money will be counted against your child's financial aid. On the other hand, the 529 plan offers tax savings and control.
If you file taxes as a single person, your Modified Adjusted Gross Income (MAGI) must be under $139,000 for the tax year 2020 and under $140,000 for the tax year 2021 to contribute to a Roth IRA, and if you're married and file jointly, your MAGI must be under $206,000 for the tax year 2020 and 208,000 for the tax year ...
There is no limit on the number of IRAs you can have. You can even own multiples of the same kind of IRA, meaning you can have multiple Roth IRAs, SEP IRAs and traditional IRAs. That said, increasing your number of IRAs doesn't necessarily increase the amount you can contribute annually.
A 529 plan, on the other hand, might easily return an average of 6% or more each year, helping you accumulate more cash for when those tuition bills start rolling in.
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