Roth IRAs – A Viable Option for College Funding?

Lately, there has been much confusion regarding the benefits of using a Roth IRA to finance a college education on a tax-free basis. This is due to the complexity of rules on taking distributions/withdrawals from Roth IRAs. There are two kinds of money in a Roth IRA: contributions and earnings. Unlike a traditional IRA, contributions to a Roth are never tax-deductible.

Since taxes have already been paid taxes on the contributions, these can be withdrawn at any time, for any reason, without paying taxes, although they may be subject to the early 10% withdrawal penalty if they come out of a Roth within five tax years. Fortunately, that penalty is waived if the contributions are used for higher education expenses such as going to college.

The same can be done with non-deductible contributions made to traditional IRAs. But, the money earned by those contributions, such as capital gains, interest and dividends is untaxed money. Untaxed money cannot be taken out without paying income tax on it until the age of 59 1/2 or older. There are some exceptions to this rule, but unfortunately higher education is not one of them.

If the earnings are withdrawn from a Roth, they are taxed at ordinary earned income rates, not the more favorable capital gains rates. Don't even think about using Roth earnings for college. A person would be far better off with a taxable account. However, a person can use Roth contributions for college.

This option is viable only if the individual has some other type of retirement plan that is funded to satisfactorily.  Obviously, the individual’s future support should come first, and the individual’s children can work their way through college. Thus, as long as the Roth isn't all that stands between a person and a mediocre, poverty ridden retirement, then yes, the Roth has some potential for college funding.

Nobody will lend an individual money for a comfortable retirement, but a student can borrow money for college. The point of saving for college is to hopefully avoid the need for a student to borrow.

But bumps in the financial road do happen sometimes, and the bottom line is that if it comes down to an either/or situation, it's more important that there is a reasonable level of retirement savings more than large college savings fund.

As far as the tax advantages are concerned, a person might as well hide the money under a mattress. The individual is simply putting some money, on which taxes have already been paid, into the Roth for a while, then taking it back out and using it to pay for college.

No taxes are paid on that kind of withdrawal just like a person wouldn't pay taxes on withdrawals from a savings account, or money you stashed in a coffee can. The tax advantages of saving for college in a Roth is good. While a person will not get tax-free treatment on earnings saved in a Roth if used for college, the contributions can be withdrawn for college expenses without tax or penalty.

The obvious solution is to leave the earnings in the Roth for retirement and withdraw the principal to pay college bills. There is some flexibility in using a Roth IRA, but here are also yearly contribution limits for the Roth, with the annual limit for the Roth IRA increasing to $4,000 in 2005, a married couple will be able to save a full $8,000 per year in Roth IRAs.

Many families with kids aren't going to be able to save more than that anyway, and if they can, the Coverdell accounts are still available to save an extra $2,000 per child per year. The treatment of college funding is often confusing, it is sufficient to say that having college savings money held in a Roth IRA can simplify the treatment of financial aid and education tax credits.

Viability of US Savings Bonds to Fund College

Saving for college has become a priority for many American families. With most university tuition rates climbing every year at record pace, it can seem nearly impossible to send your children to a good college or university without going into deep debt. But it doesn’t have to be that way. With a little planning, you can make your college savings plan go a long way.

Using a US Savings Bond to Save for College

Many parents with young children wonder if it is viable to use US savings bonds as a savings vehicle for their children’s future education. The truth is that a US savings bond can be a great way to save for college for many families.

Most US savings bonds offer competitive interest rates, and they come with the added security of being backed by both federal and state governments, as well as being subject to certain income tax benefits from both levels of government. Here is some information about saving bonds and what they can do to help you save money for your child’s college education.

The Series EE Savings Bond

One of the most popular US savings bond vehicles that are purchased by parents who are looking to save money for their children’s college education is a US savings bond from the series EE savings bond series. Analysts have recently estimated that a US savings bond from the series EE that was purchased in 2006 will likely earn 3.2 fixed interest rate percentages over the life of that bond.

The Series I Savings Bond – AKA the I Bond

What about the series I savings bond? It is also commonly known as the I bond. What is the difference between the series I savings bond and a series EE US savings bond? The main difference is that the series I savings bond carries an interest rate that is determined by the federal government.

In general, the federal government determines the interest rate for the series I savings bond by determining a basic low fixed rate, as of now that is one percent, and then adding on an inflation rate to that that reflects the latest increases in the consumer price index.

How to Make Your Money Grow with a US Savings Bond

Regardless of whether you choose an I US savings bond or a Series EE savings bond, here are some basic things you should know about how to make your money grow. First, you should always wait at least one year before cashing in your US savings bond.

You should also know that in most cases you will forfeit at least three months interest if you decide to cash in your US savings bond within five years of your initial investment date.

Tax Incentives of US Savings Bonds

In most cases, you will find that your US savings bond comes with many attractive tax benefits. For interest, you will not have to pay taxes on your interest on your state tax form, and in many cases, your interest may also be free from federal taxes.

Why a US Savings Bond May Be a Better Option than a 529 Investment

In most cases, analysts predict that a US savings bond will tend to perform better than many 529 college savings investment plans. However, this strictly depends on what kind of 529 college savings investment vehicle you have chosen.

Some state 529 college savings plans will indeed outperform a US savings bond over the long haul. Much of this depends on the condition of the market in future years, inflation trends, and a number of other fluctuating conditions.

Pros and Cons of Pre-paid Tuition vs. 529 College Saving Plan

There are so many ways for concerned parents to plan for their children’s future educational expenses. There are federal and state educational tax credits, savings bonds, savings accounts, and now, states 529 college savings incentives programs. These state 529 college savings incentives programs are relatively new, and many parents do not know whether they are suited for their financial needs.

We investigate the nature of these state 529 college savings incentives programs and what you can expect from the different types of state 529 college savings incentives programs.

Pre-paid Tuition vs. 529 College Savings Plans – Two Sides of the Same Coin

Many parents find themselves trying to decide between investing in either a pre-paid tuition program or a state 529 college savings incentives programs. The truth is that both of these represent two sides of the same coin. In truth, both of these types of plans are officially known as ‘section 529’ plans because they are both described under the same tax code and are subject to many of the same benefits. Even so, they are different and are often subject to different restrictions and benefits.

What’s All the Fuss with State Pre-Paid Tuition Plans? Pros Offer Peace of Mind

Again, a state pre-paid tuition plan is just another kind of a state 529 college savings incentives program. When it comes to a state pre-paid tuition plan, here is the basic gist of it. A state pre-paid tuition program, as the name implies, allows you to pay for your child’s tuition rates right now.

That means that you can, in essence, ‘lock in’ the current tuition rate. That way you will not be subject to the rising costs of tuition rates. This is a concern for many parents, who watch the current trend of rising tuition costs every year in despair.

Pre-paid Cons - Restrictions Abound with Pre-Paid Tuition Plans

Pre-paid tuition plans can come with associated restrictions, so make sure you understand them before you enroll. First, there is generally a firm age limit on state pre-paid tuition plans. Most state pre-paid tuition plans have a broad age limit that usually ranges from the time your child is a newborn to the time they are a senior in high school, but make sure to note the age limit when you are considering plans.

Also, there often restrictions on when you can enroll in your state’s pre-paid tuition plan. These pre-paid plans usually have special enrollment periods that mirror the enrollment period for insurance plans and the like.

Consult your state’s web site if you are not sure when to enroll. Furthermore, most state pre-paid tuition plans have restrictions on the types of expenses that they will cover. In most cases, state pre-paid investment plans will cover just that –state tuition and mandatory associated fees.

Considering a Traditional 529 Savings Plan? Pros You Can Live With

What about state 529 college savings incentives programs? Like most pre-paid college tuition programs, a state program allows you access too many federal tax incentives, including tax-free withdrawals, HOPE and Lifetime Learning tax credits, and other favorable federal tax credits. In general, a state 529 college savings incentives program allows you maximum flexibility. Most allow year-round enrollment and do not carry age limits.

Keeping Up With Inflation – Cons of the Traditional 529 Savings Plans

There are some cons associated with many state 529 college savings incentives programs. Some argue that while saving for college is good, some 529 savings plans may not be able to keep up with the growing trend of tuition increases. Like any type of investment, state 529 college savings incentives programs may simply lose their value over time.

Important Steps to Take when Saving for College

It’s time to look at some important steps to take when saving for college. The time to save is right now. It’s never too late to state a plan. Consider these tips for education savings.

Step 1. Start early. The sooner you start saving, the less you’ll need to save each year to reach your goal. The day your child arrives is not too soon to begin saving! You can take advantage of investments that promise greater returns. You can take advantage of volatile investments that are too risky for short-term college savings.

Step 2. Set up a budget. You should make a savings goal. Look at the Internet for a college cost calculator to get a rough idea of what you need to save. Then figure out how much you can put away each month to reach this goal.

Step 3. Save regularly. Get into the habit of investing a set amount of money monthly. This will set the habit of education future planning. Not a good saver? Have an automatic payroll deduction made or an automatic deposit withdrawn. This way the money is out of your checking account before you can use it.

Step 4. Use professional assistance. That’s what they’re there for. Unless you are a financial wizard yourself, talk with an experienced accountant, financial advisor or lawyer. Ask what they are doing for their children. It helps to know that your advisor can personally relate to your college savings strategy.

Step 5. Think about a 529 plan. Even if you haven’t started saving as early as you had planned a 529 plan or even a Coverdell ESA are still useful. The 529 plans offer many tax advantages. Your money will actually grow in a tax-deferred style and if your withdrawals are qualified, they will be exempt from federal income tax. Many states even give tax deductions from state income tax. Check with your state’s 529 provider for more details.

Step 6. Save in the parent or guardian’s name, not the child’s. This minimizes the impact of the fund on need-based financial aid. Also, this will prevent an irresponsible child from using their education savings fund or 529 for non-qualified purchases.

Step 7. Diversify your investments. For example it is better to invest in mutual funds than just stocks. Mutual funds spread out the risk over many stocks, which can prevent the drop in value of one stock from ruining the value of your whole portfolio. Or invest in both stocks and bonds. A good plan would be to have a mix of high and low risk investments.

An age-based 529 savings plan is a simple way to balance your portfolio. Younger children have a higher percentage of high-risk investments than older children. As children are just a few years from college, an age-based 529 plan would have almost all funds invested in low risk investments.

Step 8. Be flexible. A great new college program may be available just a few short years from now. Tax laws will change and your income circumstances may change, too. Review the steps you’re taking from time to time and be willing to make adjustments.

If you find that the assumptions behind your investment plan are not correct or your tolerance for risk has changed, you may need to change your investments. Don’t sell an investment just because the market is low; sell because of how the investment is predicted to do in the future.

There are so many important steps to take when saving for college. Any money you are able to tuck away today makes the road to college that much smoother for your child.

Overall Benefits of the 529 College Savings Plan

Saving for college can be scary. There are so many options available, and this can make it hard to choose which plan is best for you. One of the best ways to determine which type is right for you is to compare the benefits of each. One of the most popular plans is the 529 savings plan, and this plan offers many benefits. Just a few of the many benefits achieved by people who invest in the 529-college savings plan include the following:

You get to save with pretax dollars. This is the top reason for investing in any college fund, and it can save a bundle over the long-term.

You have options. Since there are two types of plans, you get to pick the best way to invest your money. You can either buy tuition credit (which allows you to purchase college time for the future at today’s prices), or it can be a simple savings set up for college. This type of 529-college savings plan is based on many types of investments—largely mutual funds.

There are more opportunities for additional funds. This includes the potential for matching scholarship and grants that you only have access to through your 529 plan.

Creditors cannot touch the funds. Unlike other types of investments or savings accounts, a 529-college savings plan is untouchable by creditors, which ensures that your child will be able to use this money for college no matter what.

During financial aid calculations, this account is not included. If you were to invest the exact same amount of money in a traditional savings account or another investment tool, it is included as part of your assets or earnings. However, the 529 plan is not, which means you have access to more financial assistance for funds.

The beneficiary does not have to stay the same. One of the biggest fears when investing in college fund accounts is that the intended child will not want to go to college when they get old enough. This is why the 529 plan allows the beneficiary to change whenever the need arises. You can switch the funds to one of your other children or even a relative who needs the money for college.

Each individual state operates its own plan. This means that it has protection from federal taxes, as well as state income and asset taxes. This also allows you to choose which state you want to invest in, but most of the time; the plan will offer added incentives for you to invest in your own state’s program.

The account does not limit where the child must attend school. There are over 8,000 schools in the United States that will allow use from these funds, so your child will still have options when it comes to which school they want to attend.

You retain control of the funds. Unlike some types of college investments, such as bonds, your child does not gain control at any age, allowing you to use the money where you see fit. This includes tuition, books, dorm fees, and more.

It allow for all income levels. There are low minimums required as monthly deposits, so virtually anyone can afford to contribute to this type of account.

As you can see, there are many benefits of the 529-college savings plan. By using a program with this many benefits, you will be able to save your child’s future education while enjoying the tax benefits in the present too. Since so many people cannot afford to live only for the future, this is one of the most prominent benefits of all.