If you have the option of saving for college in a 529 plan or a Roth IRA, which should you choose? While federal tax laws have been consistent for Roth IRAs, they have changed for 529 plans recently and are likely to continue doing so in the future. So I suggest that you find a financial advisor who has detailed knowledge and experience with these plans to work through this choice. Following are some general comments.
Factors to be considered
These factors are important: parental retirement plans and funding, parental income now and projected for the future, contribution limits, ownership and control of contributions, investment options and costs, tax consequences for both parents and dependent children, financial aid impacts, and flexibility or lack thereof of what can be done with unused balances.
And then you can add the uncertainties that come with children in terms of interest in college and alternatives to college, choices of schools and majors made and possibly changed later, and assumptions or pressure from parents as to what their child “ought” to do.
A very simplistic way to think about the choice
- If you are uncertain as to whether your retirement savings are going to be sufficient, or if you are unsure that money set aside will be necessarily used for college, choose the Roth IRA. Money in Roths can be used for either purpose and many others.
- If you are convinced that you want to set aside money specifically and only for education, that you are certain that your retirement savings are on track, that you have a satisfactory plan for paying down debt, and that you can reliably predict now what your child will wish to do when reaching college age, seriously consider a 529 plan.
- If you have sufficient financial resources to fund both after meeting retirement objectives and planning for future healthcare expenses, consider yourself very fortunate and fund both.
If you decide to go with a 529 plan without the help of a financial advisor, make sure you keep up to date with changes in IRS regulations from year to year.