Dave asks, “What are the pros and cons of using Roth IRAs to save for your children’s college (as opposed to 529 plans)?”
Let’s start with the positives –
- Withdrawal of principal (always) and growth (if held to age 59-1/2) is tax free regardless of how spent.
- 529 choices are limited and can be expensive compared to the IRA alternatives.
- If not used for college, the Roth can go about its business, being a retirement account, the 529 growth is taxed and penalized on withdrawal.
- Money in a Roth may have less of a negative impact on financial aid than the 529 account.
The negatives –
- Given the limits of IRAs, $5000 or $6000 if 50 or over, this money may not be enough to fully fund one’s college savings.
- A number of states (34 to be exact) offer a benefit for deposits to a 529 account, the Roth is purely a post tax account.
Thanks, Dave for another excellent question. If readers have additional pros or cons to this strategy, I’d love to add them to the list above.