But, if the student will be graduating in five years, they will need to wait until after January 1 of the junior year in college to take a distribution. The safest approach is to wait until after the student graduates to take a tax-free return of contributions to pay down student loan debt. A Roth IRA is a good option if the child ultimately decided to not go to college. Then, the money in the Roth IRA will give the child a head start on saving for retirement.
Assuming an average annual return of 5. The child can also choose to take a tax-free return of contributions from a Roth IRA for a down payment on a house. By Mark Kantrowitz August 1, Plans are limited to one beneficiary at a time; families with multiple children may need more than one.
Your money grows tax-free in the account. There are no income or age limits for plans. Do that early, and the money can grow throughout childhood and pretty much take care of college. If nothing else, you can make yourself the beneficiary and use the funds to further your own education. Second, the investment options are limited. Offers vary widely among states, and some state plans perform much better than others.
Make sure you also compare fees. You may know the Roth IRA as a retirement vehicle, but you can also use it to save for college. Given how good a Roth IRA is for retirement savings, does it make sense to use it to fund college? Roth withdrawals count as income for financial aid purposes and can affect how much aid will be offered. Giving away Roth money cuts retirement funds—and Roth savings come tax free when you withdraw them, with no required minimum distributions.
Many of the advantages that make a Roth IRA a great way to save for retirement make it an ideal way to save for college, too. Like the , there is no income tax deduction when you contribute to a Roth IRA. Instead, your contributions and earnings grow tax-free. First, the annual contribution limit is low.
Second, Roth IRAs do have income limits. However, withdrawals are counted, and that can affect your financial aid package. Finally, by using a retirement account for college savings, you lower the amount of money you can save for your own retirement.
If using a Roth to save for college impacts your retirement savings because you bump up against annual contribution limits, it might be better to use the Start with the list of all state plans on the SavingsforCollege.
Still, opening one in your home state may have advantages. Once you've chosen your plan, complete the application. Create a savings goal and a budget that ensures you reach it. Set up your funding mechanism, such as direct deposits, then choose your investment options.
Start saving. Not many, but there are a few. You have to use the money for the intended purposes or pay a penalty to get it back. You need to check plans carefully for good performance and fees. Not necessarily, as they also have disadvantages. For one thing, the annual contribution is low, compared to what you can contribute to a There's no state income tax deduction for Roth contributions.
They also count as income on financial aid applications, and giving away Roth money cuts retirement funds. It can be difficult to choose between a plan and a Roth IRA. This can be a good strategy. You can use the money from the first and then tap the Roth for any leftover expenses. Whatever money is left in the Roth can stay there for your retirement.
Education Loan Finance. The only way to increase your IRA balance is through the normal contributions, which are subject to the annual limits. Qualified education expenses can be used to justify only one education tax benefit. Some parents use a Roth IRA as a combined college and retirement savings vehicle. When they need to pay for college expenses, they limit their withdrawals to the contributions in order to avoid paying any income taxes on the distribution.
The earnings remain in the Roth IRA to pay for retirement. In most cases you will be better off using a section plan for your college savings. But generally speaking, withdrawing money from your retirement plan should be considered only as a last resort. You may be able to borrow money from your retirement plan to pay for college expenses for yourself, your spouse, or your children.
Typically such loans charge a percentage point or two above the prime lending rate. Similar rules may apply to b plans for employees of a nonprofit organization and plans for public employees , but not IRAs. You cannot borrow from an IRA. Also, although federal law permits borrowing from a plan, it is common for plans to be more restrictive and not permit borrowing from the plan.
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