Below are three reasons why it may be in your best interest to save for college using a Roth IRA over a 529 plan. An education IRA is a tax-advantaged investment account for higher education, now more formally known as a Coverdell Educational Savings Account (ESA). Investopedia uses cookies to provide you with a great user experience.

Roth IRA contributions can be distributed at any age, and at any time, 100% tax and penalty free. Cumulative Growth of a $10,000 Investment in Stock Advisor, 4 Times a Roth IRA Is Better Than a 529 for College Savings @themotleyfool #stocks, Today's Mortgage Rates -- October 27, 2020: Rates Staying Low Into Late October, 3 Stock Market Mistakes That Could Cost You During Election Season, 3 Reasons the Stock Market Doesn't Care About the Election. What Should I Do With My Retirement Fund?’, SmartMoney Podcast: Coronavirus and Your Portfolio. But Roths have built-in flexibility that make them an appealing option for many families saving for education.

So what’s the best way to save? If you’re looking to reduce your gift tax exposure through gifting, you can elect to make a contribution between $15,000 and $75,000 as made over five years. Nothing contained herein shall be construed as investment, legal, tax or financial advice or as a guarantee, endorsement, or certification of any investments. See the Best Brokers for Beginners, Smart Money Podcast: Reducing Taxes, and Picking the Best Investing Platform, SmartMoney Podcast: ‘I Got Laid Off.

Annual contribution limits are set by the state, but to avoid the federal gift tax, you’ll need to give no more than $15,000 per year, per beneficiary.

All 529 plans are set up at the state level, but you don’t have to be a resident of a particular state to enroll in its plan.

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There is no income limit for contributions to a 529 plan and you may contribute to any state's plan, regardless of your actual state of residence. By taking a look at different investment options and financial planning strategies, parents can compare the different options at their disposal which can make saving for a child’s education a feasible task.

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A Roth IRA often provides the exact same tax benefits. That means you can take out as much as you put in tax-free to pay for college and withdraw the earnings portion tax-free when you turn 59 1/2.

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You need to check plans carefully for good performance and fees.

If you're a parent, the prospect of paying for your child's college education may seem daunting.

Under IRS rules, single filers may contribute up to $13,000 in a single tax year to a 529 plan without incurring any gift tax.

In August 2020, the Securities and Exchange Commission (SEC) adjusted their definition of an “accredited investor” for the first time in decades. If you use 529 funds for IRS-approved "qualified education expenses," your distributions are tax- and penalty-free. Differences between Education Savings Accounts and 529 Plans The ESA and 529 have some key differences: In the ESA, the total contribution for any one beneficiary can be no more than $2,000 a year. In the 529 vs. Roth IRA contest, the Roth IRA often wins.

This article will focus on a few of the advantages of each so that you can make an informed decision as to the correct savings strategy for your family. An eligible educational institution is any college, university or school that can participate in federal student aid programs.

Instead, your contributions and earnings grow tax-free.
The EFC is the amount the IRS thinks a person should be able to pay for their own education and is calculated based on the number of assets a student and their parents have. Roth IRAs, as well as other retirement accounts are not considered assets when determining a family’s EFC. Some states offer income tax deductions for contributions to a … Even if you’re not age 59 ½ (or haven’t met the required holding period) at the time education-related expenses need to be paid, you may still be able to take funds out of your Roth IRA tax and penalty free. If you find discrepancies with your credit score or information from your credit report, please contact TransUnion® directly. A Roth IRA can be a smart place to stash that college cash for the following reasons: NerdWallet’s top picks for Roth IRA accounts: career counseling plus loan discounts with qualifying deposit, of free management with a qualifying deposit.

If you don't want your child to graduate buried by student loans, you'd better start saving early.
Saving for College: Life Insurance or 529?

And, since the passage of the SECURE Act in Dec. 2019, you can now pay off $10,000 of college debts each for the beneficiary and the beneficiary's siblings from unused 529 funds.

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You can change a 529 plan's beneficiary to another family member, so this may not be an issue if you have more than one kid.

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How to Lend Money from Your IRA Yes, you can lend money from your retirement account.