ROTH IRA as College Fund
I am single dad paying child support. I am 34 and my daughter is 6. I want to set money aside for her college in case I need it.. I figure my child support will continue to pay for a good college…. I qualify for roth at this point and prob for a few years and was thinking of using ROTH in my name to put money aside and use it for her school in 10 years or so if I needed to.
what are the ramifications for this. Must I wait 5 years on each deposit or 5 years from opening of Roth plan? I believe I can just take out deposits and not interest, which seems fine to me at this point.
any ideas? 529s just seem way to complicated.
thanks in advance.
Permalink Submitted by Alan Spross on Wed, 2007-12-05 03:38
You should probably be funding your basic retirement needs prior to funding education for children. So if you never need to tap your Roth, things will be fine. However, if you do need to tap it, your regular contributions come out tax and penalty free, and your conversions also come out tax free and penalty free to the extent of the higher education exception. If you withdraw earnings also (they come out last), the earnings will be subject to ordinary tax, but no penalty. With the early withdrawal higher education exception, you would need to be sure of the definition of the types of expenses included (Pub 590, p 53).
A 529 is more tax efficient because the earnings also come out tax free if used for qualified expenses. But you cannot use a 529 for your retirement in an efficient tax manner, so you should fund your own Roth or other IRA first, and at some point, then consider a supplemental 529. Another good thing about the Roth is that it is your retirement fund, so the assets are not counted for purposes of financial aid the child might qualify for.
In summary, unless you have plenty of other retirement money, you should be funding that first unless the divorce decree says differently, and it is probably silent on this issue.
Permalink Submitted by John Jawor on Wed, 2007-12-05 15:08
I understand about my retirement being my priority…as it stands, I dont qualify for regular IRAs and max out my 401k. So, using ROTH allows me to supplement, use it if necessary in whatever capacity for my daughters college I may need to, and provides some oops clause with the penalty free withdrawal options…
I will do the ROTH until I can’t which should be in a few years as my income rises… then I will use 529. I am just hesitant to put it all in there for all the obvious reasons.
Thanks again!