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. These accounts include 529 plans and the Coverdell education savings accounts (ESAs). 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 100 questions on the application for Federal Student Aid (FAFSA). These questions 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. The number of assets a student and their parents have determines the EFC amount. This calculation includes most assets, including 529 plans. 529 plans may increase the EFC and reduce the amount of financial aid the student receives. Roth IRAs and other retirement accounts are not considered assets when determining EFC. There is also no cap to the amount you can have inside a Roth IRA. So, it’s not going to decrease the student loan amount you or your child receives.

Roth IRAs are more flexible.

If 529 funds are not used for qualifying expenses, distributions can be 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 the funds for education, you can use them 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 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 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. You can distribute Roth IRA contributions 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.