College savigs

[britfish]

We are a little behind the curve on saving for DD's college but finally are in a position to really start putting some money away. We were encourage to open a 529, is this the best option? DD is 8. Sorry for the misspelling in the title

 

[clh2]

At that age, our financial planners recommended using a Roth IRA for a college savings plan. We didn't start to use a 529 until our DD was in high school.

DH and I were maxed out on our respective 401k and 403b's at work, so we were contributing to our retirement. The Roth money is all for college, but if we do not need it all, then it will transfer to our retirement.

This advice may not work for everyone, we did lose out on some state income tax benefit by not making those contributions to the 529, but the concern was "what-if" DD does not go to college. And while you can transfer the 529 funds to a different family member, DD is an only, so there really isn't anyone to transfer it to.

The key here is-we have a great financial planner, whose advice we trust.

 

[britfish]

What type of penalties will you pay for withdrawing the money from the Roth for college?

 

[clh2]

What type of penalties will you pay for withdrawing the money from the Roth for college?

There are no penalties-check out this info from the IRS

http://www.irs.gov/publications/p970/ch09.html

Our DD is going to be a junior in college in the fall, and this has worked well for us. Currently, there is the opportunity tax credit (up to $2500) if you have spent 4000 on things like tuition and books (but not room and board), but that has to be "virgin" money, i.e. Can't be from a 529. So as you get closer to your DD being in college, you will want to see if there is something similar, and make sure you have appropriately planned to take advantage of the tax credit.

I cannot say too many times, we use a trusted financial planner, and that is where we got the Roth advice from.

 

[disykat]

We did a combination of things.

1. I only worked part time when the kids were little and planned on me going back full time when kids were nearing college.

2. Paid off our mortgage the spring the first one graduated from high school, freeing up that money.

These two mean a lot of our payments come from current cash flow. Since we pay out a lot in cash, we benefit from the tax credits mentioned above.

3. IRA contributions that could be pulled for college, but hopefully won't be.

4. Our state pre-paid tuition program. (It can be used ANYWHERE, and can be refunded minus the growth if not used.) We bought enough to cover tuition costs for the years BOTH our kids would be in school at the same time.

 

[Patience]

Regarding the tax credit, it may not be around forever but for those with gross household adjusted incomes of $160,000 (I think that's correct but of course check for yourself) with kids going to college fairly soon, it's a good idea to pay cash for tuition up to the amount you can claim for the tax credit. Otherwise, 529's and Roths are good savings vehicles.

 

[3boymthr]

We did a combination of things.

1. I only worked part time when the kids were little and planned on me going back full time when kids were nearing college.

2. Paid off our mortgage the spring the first one graduated from high school, freeing up that money.

These two mean a lot of our payments come from current cash flow. Since we pay out a lot in cash, we benefit from the tax credits mentioned above.

3. IRA contributions that could be pulled for college, but hopefully won't be.

4. Our state pre-paid tuition program. (It can be used ANYWHERE, and can be refunded minus the growth if not used.) We bought enough to cover tuition costs for the years BOTH our kids would be in school at the same time.

Penny for penny this is financially the best investment. My parents invested $20,000 in the state prepaid tuition plan ($5,000 for each of the 4 years he would be in school) for oldest DS when he was in 1st grade (they actually did this for all my kids - I'm blessed ). He's graduating tomorrow. That $5,000/yr. is now worth $6,900/yr. in cash value to use at any school he chooses but he has elected to use it for one of the state universities on the plan - there were 100 to choose from with a variety of values in tuition. Which translates into 100% tuition AND FEES (which is HUGE at state schools) at the school he has chosen - a value of $8,500. Way more than if they had invested in a Roth or traditional 529 (which they also did - that $5,000 is worth $6,200).

 

[mjkacmom]

All of our kids have 529's (in a different state). I don't know exactly why, but it's what DH decided (he's been a CFP for over 20 years).

 

[abmitch01]

another way to save is to put 5k in your Roth IRA every year. You can take out what you put in without penalty but not the earnings. So the earnings accumulate for your retirement and you have the 5k for education

 

[Jeff_G]

I am going to buck the trend and say dont use the Roth IRA but go ahead and open a 529 plan. If you get a state tax deduction and your state's 529 plan inst 1.2 bad go ahead and use it, otherwise use one of the other state 529 plans that has good options for you.
See: http://www.savingforcollege.com/


Here is why I say dont use the Roth IRA. You likely have 25 to 30 years before retirement vs your DD has 10 years until college. You may want your retirement investments in a more aggressive track then you would want your DDs college money. You dont want to get into the college years and hit a down turn in the market and still have the investments in an aggressive fund.

You don't want to be pulling Roth money out when the market is 1/2 down. On the same hand you don't want to pull 529 money out if the market is way down either. So ideally you would adjust your 529 investments to slowly move towards less aggressive funds as college nears.


Having said all of that I would make sure you are funding your retirement before you start to fund your DDs college.

 

[HM]

We have 529s for our kids.
We lost a ton of money in the stockmarket crash of 2008. We'd just made back the amount of money that we put into the account ourselves when our son started college in 2011. For us, we would have come out better with a plain savings account instead....but who knew that the economy would crash like that.

 

[3boymthr]

We have 529s for our kids.
We lost a ton of money in the stockmarket crash of 2008. We'd just made back the amount of money that we put into the account ourselves when our son started college in 2011. For us, we would have come out better with a plain savings account instead....but who knew that the economy would crash like that.

This is why the prepaid savings plans are best. They have the invisibility/Transparency of the Roth. Unlike a 529 they do NOT factor into your financial aid. However; unlike a 529 or a Roth, at least here in MA, there is no market volatility. The rate (percentage) of tuition of prepaid tuition that you lock in at on the day you pay into the plan is the rate you will have the day you go to pay that tuition bill Plus as I said they far far far out performed the stock plans on return on investment a 48% return on investement vs. a 20% ROI.

 

[HM]

This is why the prepaid savings plans are best. They have the invisibility/Transparency of the Roth. Unlike a 529 they do NOT factor into your financial aid. However; unlike a 529 or a Roth, at least here in MA, there is no market volatility. The rate (percentage) of tuition of prepaid tuition that you lock in at on the day you pay into the plan is the rate you will have the day you go to pay that tuition bill Plus as I said they far far far out performed the stock plans on return on investment a 48% return on investement vs. a 20% ROI.

This type of plan isn't available in NC. Or wasn't when we started saving for college.

 

[3boymthr]

This type of plan isn't available in NC. Or wasn't when we started saving for college.

That's stinky but if you know your child wants to go to a specific private out of state school it's something to look at. Some states allow out of state enrollment. I believe MA does if you don't have a plan in your state and you want to go to one of the included college. The plan in MA has 100 schools involved and a large percentage are private colleges. Included in that list are a number of prestigious private colleges such as Boston University, Boston College, Northeastern University, Amherst and Smith. In other states you may find other prestigious colleges as well.