IRAs and ROTHs vs. 529s??

Submitted by star pollack on Sun, 2020-03-22 14:04

Hi Alan—many thanks for previous info on RMDs- immense help.
NYS residents…after son and daughter-in-law have put enough in yearly to 3 sons’ (ages 11, 9, 6) 529s to get the NYS tax deduction, what are advantages/disadvantages of then using ROTHs or IRAs to fund college?
Regards,
Star



Submitted by William Tuttle on Sun, 2020-03-22 16:04

  • Traditional IRAs are subject to ordinary income taxes and a 10% early withdrawal penalty prior to age 59 1/2.
  • Roth IRA contributions can be withdrawn tax free at any time. However, earnings are subject to ordinary income taxes and a 10% early withdrawal penalty prior to age 59 1/2.
  • Also, Traditional/Roth IRA distributions are treated as taxed/untaxed income for FAFSA purposes. For a parent these are assessed at a 20% income/0% asset rate vs. a 529 at a 0%* income/5.64% asset rate.

*For qualifed distributions. For parents/students on the FAFSA financial aid bubble. IRA distributions income assessments will cause a far greater negative impact on fiancial aid than 529 asset assessments.

Submitted by Alan - IRA critic on Sun, 2020-03-22 16:44

Note that distributions from an IRA or Roth IRA that would be subject to taxes (including conversion money within 5 years not subject to taxes), will be exempt from the 10% penalty for distributions used for higher education expenses for yourself, spouse, and childen and granchildren of yourself or spouse. Check Pub 590 B for the detailed definition of qualified HE expenses.

Submitted by William Tuttle on Sun, 2020-03-22 20:25

but, the FAFSA effects are still relevant.

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