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What’s the Best Way to Save for College, a Roth IRA or a 529 Plan?

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Illustration for an article titled Do you need to open a Roth IRA or a 529 savings plan?

Photo: eamesBot (Shutterstock)

The Roth IRA and 529 savings plans are great for saving for college – both are taxed in advance, allowing you to withdraw your investment after it has been increased due to compound interest rates without being hit by a huge IRS account. But which is better? Like most choices that involve your portfolio, they are trade-offs for everyone, as Roth IRAs offer more flexibility in how money can be spent, while 529s have higher contribution limits that can maximize savings. Here are some other factors to consider.

Advantages and disadvantages of Roth IRA

Roth IRA are created for retirement savings, but unlike other retirement accounts like 401 (k), you pre-tax your contributions, which means you won’t tax later when the total investment is withdrawn. The only catch is that you have to wait until age 59 to be able to cash in those funds that can be used for whatever you want (unlike the 529 savings plans that charge penalties if you don’t use them for education spending). On the other hand, Mr.or can withdraw the money you have contributed (ie that you have paid – not including the return on your investment) at any time, without taxes and penalties, without waiting for the 59th year of life.

Pros Roth IRA

  • Your contributions (not earnings) can be withdrawn at any time without penalty or tax.
  • When you turn 59, everything money can be withdrawn without taxes and penalties, provided that the account is open for at least 5 years (otherwise you can owe income tax on earnings).
  • Here no penalty of 10% for early withdrawal of all your earnings if money is spent on qualified education expenses, although you will still do so they have to pay income tax on it.
  • If you do not need all the money for education, you can use the rest for retirement.

Against the Roth IRA

  • You are likely to owe income tax and a 10% penalty on early earnings before the age of 59½ (although, as noted above, the additional The penalty is 10% give up if you use the money for qualified education expenses). Even after that age, you can owe taxes and fees if the account is not opened for at least 5 years when you make a withdrawal.
  • There are income limits, and the amount you can contribute will be phased out if you earn more than $ 125,000 for individual files or $ 198,000 for shared fillers (you will be fully does not qualify for a contribution if you earn more than $ 140,000 and $ 208,000, respectively).
  • The tax implications of applying for student aid areit is not favorable, because withdrawals are counted as income for financial assistance, which can negatively affect how much help will be offered.
  • Unlike 529 savings plans, Roth IRA contributions cannot be deducted from your state tax.
  • The annual contribution is low compared to 529s; you can only contribute up to $ 6,000 ($ 7,000 if you are 50 or older) in 2021.
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Advantages and disadvantages of 529 savings plans

Plan 529 is specifically designed as a savings fund in education and is therefore limited to qualified educational expenses such as textbooks and tuition (unless you want to pay taxes and a 10% penalty). UUnlike the Roth IRA, you don’t have to wait until you’re almost 60 years old make payments.

Pros of 529 savings plans

  • There are no income and age limits for withdrawing money.
  • Withdrawal taxes are not used eligible education costs.
  • Contributions for your 529 may be tax deductible at the state level.
  • There are almost no restrictions for contributions you can make in any year, although there may be a lifetime limit, depending on your country (usually about $ 500,000).
  • You can replace or switch users.

Against 529 savings plans

  • Less flexibility– You must use the money for its intended purpose or pay a fine to return it.
  • Investment options tend to be more limited than the Roth IRA.
  • The plans are connected to one user at a time, which means you have to set up a separate account if you want to save for more than one child.
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Which college investment plan should you choose?

When choosing between a Roth IRA ia 529 savings planThe best option will depend on what is important to you: flexibility in how You can spend your investment or flexibility in when you can spend it. 529s allow you access to tax-free money at a much younger age, but there is a risk that you will be taxed and penalized if you do falling plans for school, which is not the case with Roth IRA. Taxes and income must also be considered as a contribution restrictions because the Roth IRA may not meet your specifics needs.

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