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Benefits of a Roth IRA Over a 529 Plan for Educational Savings

Benefits of a Roth IRA Over a 529 Plan for Educational Savings

Rising tuition rates may make it harder to attend the university of your choice. There are savings accounts available to help with the cost such as 529 plans (qualified tuition programs) and the Coverdell education savings account (ESA). It may seem out of the ordinary to use a retirement account to save for college, but you can.

Below are three reasons why it may be in your best interest to save for college using a Roth IRA over a 529 plan.

Roth IRAs aren’t included as an asset on the FAFSA form.

There are more than a hundred questions on the free application for Federal Student Aid (FAFSA) which help determine the expected family contribution (EFC). The EFC is the amount the IRS thinks a person should be able to pay for their own education and is calculated based on the number of assets a student and their parents have. Most assets, including 529 plans, are included in this calculation. This could end up increasing the EFC and reducing or eliminating the amount of financial aid the student will receive. Roth IRAs, as well as other retirement accounts are not considered assets when determining a family’s EFC. There is also no cap to the amount you can have inside a Roth IRA therefore it’s not going to decrease the amount of student loans you or your child receives.

Roth IRAs are more flexible.

If the funds in a 529 plan are not used for qualifying expenses, distributions can go from being tax free to being quite expensive. You don’t know if your child will receive a scholarship or decide not to attend college. With a Roth IRA you may use the money to pay for your education, or if you no longer need those funds for educational purposes they can easily be used for retirement purposes.

Roth IRAs may provide the same tax-free treatment for distributions.

The main purpose of a 509 plan is tax-free distributions for education purposes. A Roth IRA often provides the exact same tax benefits. If you are over age 59 ½ at the time you take distributions from your Roth IRA and you’ve had any Roth IRA for five years or longer, then anything you take out of your Roth IRAs will be 100% tax and penalty free. Even if you’re not age 59 ½ (or haven’t met the required holding period) at the time education-related expenses need to be paid, you may still be able to take funds out of your Roth IRA tax and penalty free. Roth IRA contributions can be distributed at any age, and at any time, 100% tax and penalty free.

Don’t let high tuition costs keep you from furthering your children’s education! Contact Midland IRA at 239-333-1032 to open your Roth IRA and to begin saving for you or your child’s education!

*Resource: “3 Reasons to Use a Roth IRA Over a 529 Plan for Education Savings” Ed Slott Report

If you have any questions about how Roth IRAs can help with an education savings plan, contact Midland today.