We often get asked about putting money away for a child’s college education. Most people assume that they must use a 529 plan to accomplish this goal.
While 529 plans are sometimes great college planning tools, other times they are less than ideal. Many 529 plans come loaded with fees, and leave many parents worrying: what if our child doesn’t go to college? The point is that (like with all investments) people need to weigh their options before jumping in. 529 plans might be right for some, but not all investors.
In certain instances, a Roth IRA might be a preferable college planning tool. Tom discusses the viability of this on our weekly video.
In the case of 529 plans, money withdrawn for non-educational expenses will mean paying taxes and a 10% penalty. For many parents this is discouraging because they have no idea if their son or daughter will go to college. They’d like them to, but nobody can predict the future.
A Roth IRA might be preferable to a 529 plan in this regard because of certain qualified exceptions on distributions. One Roth IRA qualified distribution exception is for higher educational expenses, meaning money could be taken out to pay for college tuition, books, etc. The investor would not be subject to the typical early withdrawal penalty of 10% if used for this reason.
Another point to consider: not only could the money be taken out for college expenses penalty-free through the qualified exception, but it could also continue to be saved in the scenario that their child does not attend college. The money will continue to grow tax-free towards a goal that nobody can borrow money for: retirement. Many investors like knowing that they can use this money to pay for their child’s education, but if not it can go towards their retirement without any type of penalty.
529 plans certainly have their place as a college planning tool, however investors need to know that they have other options to consider as well. For some people, a Roth IRA might be a viable college planning tool.
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