Here’s a quick checklist to help you determine which tax-advantaged savings option might work best for you if you think you might need to create a college savings fund:
Share to linkedinThere must come a time each year when the topic turns to taxes. Among other things, this event presents many parents of young children with an important decision: save in a Roth IRA or 529 plan? Which offers a better way to save for college? Which offers greater flexibility in an uncertain future? Which offers the best solution to your specific set of circumstances?
Below is a checklist to help you determine which option might be best for you. Before you get there, here are some frequently asked questions that explain some of the differences between the Roth IRA and a 529 plan.Roth IRAs fall under federal regulations. Each state sponsors its own 529 plan. Individuals must shop for the state which offers the most favorable treatment. The 529 beneficiary need not reside in that state nor go to school in that state.
to a Roth IRA. As of 2019, eligibility begins to phase out at an income level of $122,000 for single filers and ends completely at $137,000 for single filers . The Roth 401 does not have any phase-out provision. Unlike Roth IRAs where contributions can be made up to April 15of the tax year to which it applies.
out of a Roth IRA. In general, Roth IRA contributions can be taken without tax consequences. This makes the Roth IRA an attractive option if the educational expenses aren’t expected to exceed the amount originally contributed. Outside these parameters, withdrawing from the Roth prior to age 59½ and less than five years after the contribution can result in taxes and penalties.
If you have to make the choice of one or the other, here’s a handy checklist to use. Be sure to consult with your tax advisor before making any decision.You have earned income and it’s less than $122,000 or $193,000 .You don’t want contributions to count against your annual or lifetime gift exclusion.You want the option of using your savings for retirement.
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