occur before retirement it is likely you will sharply reduce, if not use up entirely, the money in the account, leaving you high and dry for retirement. You need to resolve not to allow your retirement to be derailed by a competing demand that chronologically happens to occur first; chronologically is not how I want you to prioritize. As I explain in the class on retirement planning in your 20s and 30s, a Roth IRA is my favorite type of retirement account. I just want you to use it for retirement, first and foremost. Now, that said, if you have set up a Roth IRA with the explicit purpose of using it for college costs, that is a different matter. In that instance using your original contributions to the Roth to pay for school—they are not taxed nor do you owe any early withdrawal penalty—is a fine strategy. Just remember to leave the earnings in the account and use that for your retirement. If you were to make an early withdrawal of earnings from a Roth you might be hit with tax.
But please stand in your truth. If you know deep down that the Roth IRA you have is needed first and foremost for your retirement, please do not use it for college.
WHAT IF YOUR CHILD DOESN’T NEED THE 529 MONEY?
There are some important rules you need to understand in the event your child chooses not to go to college or is awarded so much in grants and scholarships that you don’t need all the money you have set aside in a 529 plan.
You can transfer the account to another beneficiary . Most 529 plans allow you to switch a beneficiary to another family member, including siblings (and step-siblings), nieces, nephews, first cousins, and in-laws. You could also name yourself the beneficiary and use the money to go back to school.
You can withdraw the money for noneducational purposes . There is no penalty or tax on money you contributed to the account, but if you withdraw earnings from the account and that money is not used for education purposes, it will be subject to income tax as well as a 10% penalty.
HOW TO CHOOSE THE BEST 529 PLAN FOR YOUR FAMILY
There are two flavors of 529 plans: direct sold and advisor sold. I only want you to consider direct-sold plans. The fees for advisor-sold 529 plans are too high, and often the advisor-sold lineup of investment choices does not include low-cost index funds. If you want the advice of a trusted financial advisor on how to handle your college savings, pay the advisor a separate flat fee for his work rather than have him guide you into expensive advisor-sold 529 funds. If your advisor only uses advisor-sold 529 funds I recommend you find a new advisor who is not dependent on commissions. At NAPFA.org you can search for local advisors who work on an hourly or fee basis.
TIP: I highly recommend every family spend some time at Savingforcollege.com . It has wonderful articles and tools to help you make an educated decision about the best 529 plan for your family. Here are some important issues to consider:
Compare your state plan to an out-of-state plan . Every state offers its own 529 savings plan. But please understand that you are not obligated or required to stick with a plan offered by your state. You can in fact invest in any plan from any state and use your money to attend any school in any state. The sole advantage of sticking with your state’s plan is if it offers valuable tax breaks or other incentives to residents. For example, contributions you make to any 529 plan are not eligible for a federal tax deduction. But some states allow in-state residents to claim a state tax deduction or a credit on their contributions. That said, there is often a limit on the value of the tax break, and in some states there is an income cutoff to be eligible for the tax break.
At Savingforcollege.com you can find state-by-state information on the tax treatment for in-state residents. This is obviously an important consideration when choosing a 529 plan, but it should not be your only consideration. It
But please stand in your truth. If you know deep down that the Roth IRA you have is needed first and foremost for your retirement, please do not use it for college.
WHAT IF YOUR CHILD DOESN’T NEED THE 529 MONEY?
There are some important rules you need to understand in the event your child chooses not to go to college or is awarded so much in grants and scholarships that you don’t need all the money you have set aside in a 529 plan.
You can transfer the account to another beneficiary . Most 529 plans allow you to switch a beneficiary to another family member, including siblings (and step-siblings), nieces, nephews, first cousins, and in-laws. You could also name yourself the beneficiary and use the money to go back to school.
You can withdraw the money for noneducational purposes . There is no penalty or tax on money you contributed to the account, but if you withdraw earnings from the account and that money is not used for education purposes, it will be subject to income tax as well as a 10% penalty.
HOW TO CHOOSE THE BEST 529 PLAN FOR YOUR FAMILY
There are two flavors of 529 plans: direct sold and advisor sold. I only want you to consider direct-sold plans. The fees for advisor-sold 529 plans are too high, and often the advisor-sold lineup of investment choices does not include low-cost index funds. If you want the advice of a trusted financial advisor on how to handle your college savings, pay the advisor a separate flat fee for his work rather than have him guide you into expensive advisor-sold 529 funds. If your advisor only uses advisor-sold 529 funds I recommend you find a new advisor who is not dependent on commissions. At NAPFA.org you can search for local advisors who work on an hourly or fee basis.
TIP: I highly recommend every family spend some time at Savingforcollege.com . It has wonderful articles and tools to help you make an educated decision about the best 529 plan for your family. Here are some important issues to consider:
Compare your state plan to an out-of-state plan . Every state offers its own 529 savings plan. But please understand that you are not obligated or required to stick with a plan offered by your state. You can in fact invest in any plan from any state and use your money to attend any school in any state. The sole advantage of sticking with your state’s plan is if it offers valuable tax breaks or other incentives to residents. For example, contributions you make to any 529 plan are not eligible for a federal tax deduction. But some states allow in-state residents to claim a state tax deduction or a credit on their contributions. That said, there is often a limit on the value of the tax break, and in some states there is an income cutoff to be eligible for the tax break.
At Savingforcollege.com you can find state-by-state information on the tax treatment for in-state residents. This is obviously an important consideration when choosing a 529 plan, but it should not be your only consideration. It
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