Withdrawal From Ira For Education Expenses

Posts Tagged ‘withdrawal from ira for education expenses’

Withdrawal From Ira For Education

November 21st, 2009

Question: Roth IRA or 529 investment account?

I am 32, divorced and have two kids (one 9, one 11). I have begun putting about 6K into my 401K this year. I am planning to put about 3000 per year into a 529, but am wondering if I am better off contributing to a Roth IRA instead. I know with the Roth IRA, you can withdrawal for higher education without penalty for the amount you put in since it was already taxed. If I put it into a 529, it would be pretax, but I would pay a 10% penalty if my children either got a scholarship to school or did not attend for whatever reason. As bad as taxes are now, I figure they will be worse 10 years from now.

I guess you can’t roll a 529 into a Roth IRA, can you? If not, which do you think I am better off with.

Theoretically, my ex and I would be going half in so we should be ok (unless they want to go to Harvard – then all bets are off. Ugh.)

Answer: Do you know that this is actually a trick question? (as there is no “yes” or “no” answer for this.) The answer depends on your situation. And to understand the answer, you MUST understand the difference between the two plans. Specifically:

* same: contributions to both are after-tax (different from 401K, for example)

* different:
– Roth’s contribution is tax-free; however, Roth’s gain is taxable as income until your later years (after 59.5 yr-old)
– 529 plan’s contribution & gain are both tax-free, as long as you use both for college education. Otherwise, the gain might be taxed as income or penalty might kick in.
– Roth eligibility depends on your income; 519 plan does not (but it has cap on maximum contribution, annual as well as lifetime, depend on the plan.)

There are also many other differences, but you can see that from the above, decision might be a bit tricky. For some folks whose kids will need the money when they are 59.5 yr-old or older, Roth IRA can be a powerful vehicle to prepare for both your retirement and your kids’ college fund. But your situation is not that (you are 32 now and will be around 40-45 when your kids go to college.) So my recommendation is to actually not confuse between the two. Going half/half is possibly the right advice for you at this time. If you can max out your Roth contribution and put the remaining in 529 plan, it will be the best .