College Savings: Roth IRA or 529 Plan? (taxable, expenses, company, tax)

[Bill the Butcher]

Situation: Live in CA. Two daughters 4 and 1.5 years old. Wife is a public employee and has a defined benefit plan. I have a work IRA. We both also have individual IRAs. Between our two individual IRAs we currently contribute about $7200 out of an eligible $11,000.

I don't like that 529 plans can only be used for college expenses. We basically have 20 years till we need the money and a lot could change between now and then. College could be free? Scholarships could be earned? Maybe they go to a junior college the first two years? Is it wiser to instead but the college savings into the IRAs? Are there downsides I am not considering?

Edit: I meant to post this in Personal Finance.

[Lowexpectations]

With a 529 you can withdraw your contributions without a taxation issue. You can also withdraw an amount equal to a scholarship in the year/amount the scholarship covers. I would max a Roth first before considering the 529

[txgolfer130]

You can withdraw the contributions from a 529 w/out taxation IF they are used for a qualified expense or unless the child receives a scholarship. Any gains though on the investments could be subject to be taxed as income.

[WVNomad]

I don't know how old you are, but if your kids will be in college after you are 59 1/2, you can pull out contributions and earnings from a Roth tax free and without penalty.

My kids finished college a few years back and we made pretty judicious use of 529 plans to finance their college educations. You are correct that nobody knows what the future holds in terms of college expenses (maybe it will be free or an entitlement), maybe the kids will get scholarships, or maybe the kids won't go to college. But my own experience/perspective is that it is better to be err on the side of having too much rather than too little saved, and the the tax advantages of the 529 outweigh the uncertainties of saving using other investment vehicles (e.g. In a taxable account). If your kids do go to college (and my guess is you will be able to discern if this is likely relatively early on), then it is pretty difficult to over save for college when you consider all of the costs, tuition, room, board, books, fees, etc. I would not hesitate to shovel as much money into a 529 Plan as you can afford (subject to saving for retirement, etc.). Good luck...you will be dropping the kids off for freshmen orientation before you know it.

[Lowexpectations]

Originally Posted by txgolfer130

You can withdraw the contributions from a 529 w/out taxation IF they are used for a qualified expense or unless the child receives a scholarship. Any gains though on the investments could be subject to be taxed as income.

You can withdraw contributions for any reason without taxation, the gains have to be for qualified expenses or meet other criteria to avoid the taxation issue

[Bill the Butcher]

Originally Posted by WVNomad

I don't know how old you are, but if your kids will be in college after you are 59 1/2, you can pull out contributions and earnings from a Roth tax free and without penalty.

Thanks for the advice. I will only be in my late 40's / early 50's.

I think we are comfortable with our current retirement savings and if we add in about 3000 more per year into the ROTH then in about 15 years we can begin withdrawals from the ROTH account on the contributions to cover college expenses.

[grouse789]

Always max out your retirement accounts before college savings. YOU/ your retirement are more important than them going to school on your bill. once Roth is maxed, then save for college. Plus you can withdraw from a roth tax free your principle amount, if you need.

[lewdog_5]

Originally Posted by Lowexpectations

You can withdraw contributions for any reason without taxation, the gains have to be for qualified expenses or meet other criteria to avoid the taxation issue

Never had thought of that. It's a great point.

So most would recommend to only contribute to a 529 plan if you can max your Roth IRA first each year?

[Lowexpectations]

Originally Posted by lewdog_5

Never had thought of that. It's a great point.

So most would recommend to only contribute to a 529 plan if you can max your Roth IRA first each year?

Well there’s a second leg, I think some states give state income tax break for 529 contributions. If that doesn’t apply I’d go Roth first

[Bill the Butcher]

So sounds like Roth is the way to go. I don't foresee us having anything extra to contribute after maxing out the Roths at 11,000 per year and also contributing to the company match for the work IRA. I don't believe CA is one of the states that gives any sort of tax advantage for 529s.