Planning for Children's College Expenses ROTH IRA vs 529 Education IRA?

[panda]

Just curious to see if any of you have setup a 529 Education IRA, ESA (education savings account) to prepare for your children's future college expenses. Another alternative I have heard that you can use your Roth or IRA account to fund your children's college expenses before you are 59.5 without paying the 10% early withdrawal penalty if the funds are used towards education purposes which also includes books and room and board. This would give you more flexibility as the funds you do not use toward college expenses can be used towards your retirement income.

Do you think it is better to use your Roth IRA or a 529 Education IRA to fund your child's future college expenses. How are you guys currently planning? In California, do you guys have a program where you can pre-pay tuition to lock in today's rate vs 10 years down the road?

 

[WTTCHMN]

Just curious to see if any of you have setup a 529 Education IRA, ESA (education savings account) to prepare for your children's future college expenses. Another alternative I have heard that you can use your Roth or IRA account to fund your children's college expenses before you are 59.5 without paying the 10% early withdrawal penalty if the funds are used towards education purposes which also includes books and room and board. This would give you more flexibility as the funds you do not use toward college expenses can be used towards your retirement income.

Do you think it is better to use your Roth IRA or a 529 Education IRA to fund your child's future college expenses. How are you guys currently planning? In California, do you guys have a program where you can pre-pay tuition to lock in today's rate vs 10 years down the road?

Why are you pre-paying tuition?  I thought your kids will go to Georgia Tech for free.

 

[panda]

That would be nice if both my boys got a full ride to Tech.....  Unfortunately, it doesn't work that way and it is difficult to predict that far out. They may not want to go an in-state school or may get into a top private school. 

Today the 4 years in-state tuition + room/board will cost you $98,992 per child and for out-of-state $176,208 per child, $200,000 for private school per child.  I would expect tuition prices to double in about 10 years when most of our children will be applying for college by then.

Just curious to see if any of you have set up a 529 plan?

Just curious to see if any of you have setup a 529 Education IRA, ESA (education savings account) to prepare for your children's future college expenses. Another alternative I have heard that you can use your Roth or IRA account to fund your children's college expenses before you are 59.5 without paying the 10% early withdrawal penalty if the funds are used towards education purposes which also includes books and room and board. This would give you more flexibility as the funds you do not use toward college expenses can be used towards your retirement income.

Do you think it is better to use your Roth IRA or a 529 Education IRA to fund your child's future college expenses. How are you guys currently planning? In California, do you guys have a program where you can pre-pay tuition to lock in today's rate vs 10 years down the road?

Why are you pre-paying tuition?  I thought your kids will go to Georgia Tech for free.

 

[lnc]

Here's another way to secure college fund.  Found it in another site.  Its kind of extreme but quite brilliant.

There's no incentive to save for college anymore.

The financial aid process absolutely punishes anyone who has any actual assets to pay for college. The system is basically an asset tax under the guise of "here's what you can afford to pay". If you have assets, you get reamed at 20-25% / year. (It's only 5%/year for 529 plan assets, but that's still a tax.) If you have no assets, you can get aid (aka a price reduction), and if you can't get aid you can still borrow the money at low rates.

401K and IRA savings are immune to financial persecution. Home equity is safe under the FAFSA system (mainly public schools) but not the Profile (more elite) schools. So it makes more sense to stash income in a 401K, bargain for a lower sticker price, and then hope that the 401K money earns more than the interest on the student loans.

If you've got bright kids or are aiming for a private school, you're better off not paying off your mortgage early, because home equity gets taxed at like 20%/year as well.
If you've got income, that's effectively taxed too, at 25%, so if you're in a high-tax state you can go from the 25% or 30% federal bracket, through a 9% state income tax and 9% sales tax, and toss in another 25% in "college tuition cost increase" tax, and watch yourself paying what is effectively a 75% marginal tax rate. It's even worse than living in Europe...

You could rephrase the way colleges are priced as "from each according to his ability, to each according to his need", and watch Marx and Lenin smile, except that their spirits have seen how that system fails, and this one is failing as well.

The plan for paying for college (especially for second-income parents):
1) Save for college tuition only by way of a 401K or IRA
2) Minimize home equity (store up savings in the 401K/IRA instead of as home equity)
3) Quit working about 2 years before your oldest goes to college, to show little income on the student aid forms.
4) Reap effective income of $15-60K/year per child in the form of scholarships and tuition reductions for each child.
5) Live off 401K or IRA while students are in college. The 10% penalty tax might be the only tax you pay!
6) Resume working and saving for retirement after the kids finish college and the financial aid office no longer has a death grip on your ability to accumulate wealth.

Re-post from another thread:http://www.talkirvine.com/index.php/topic,11681.msg245177.html#msg245177[/SIZE]

 

[panda]

Inc,

Thanks for the post. One of the reasons I like Roth IRA as a vehicle to pay for college over the 529 plan is due its flexibility. 529 allows you to grow your money tax deferred, however whatever you do not use for your children's college expenses you can either change the beneficiary to another family member or 1st cousin. However if you want to withdraw the amount that was not used in the 529, this amount will be taxed as ordinary income and subject to a 10% penalty. Another disadvantage I see with a 529 is that you are limited to select mutual funds that may have very high expense ratios. With a Roth you full control in what you invest in (i.e. securities, etfs, forex etc). If you use your Roth to pay for your children's college expenses before you are 59 1/2, only the amount you contributed to the Roth is considered tax free and you will not pay the 10% early withdrawal penalty as the funds were used to pay for educational purposes. However, I do believe that any capital gains from the Roth IRA will be taxed as ordinary income if withdrawn before the age of 59 1/2.

The benefit of the Roth is that whatever is left over from education expenses can be used towards your retirement income. Just wanted to get other's opinion whether they prefer 529 or Roth IRA for the purposes of future college expense.   

 

[WTTCHMN]

That would be nice if both my boys got a full ride to Tech.....  Unfortunately, it doesn't work that way and it is difficult to predict that far out. They may not want to go an in-state school or may get into a top private school. 

Today the 4 years in-state tuition + room/board will cost you $98,992 per child and for out-of-state $176,208 per child, $200,000 for private school per child.  I would expect tuition prices to double in about 10 years when most of our children will be applying for college by then.

Just curious to see if any of you have set up a 529 plan?

Just curious to see if any of you have setup a 529 Education IRA, ESA (education savings account) to prepare for your children's future college expenses. Another alternative I have heard that you can use your Roth or IRA account to fund your children's college expenses before you are 59.5 without paying the 10% early withdrawal penalty if the funds are used towards education purposes which also includes books and room and board. This would give you more flexibility as the funds you do not use toward college expenses can be used towards your retirement income.

Do you think it is better to use your Roth IRA or a 529 Education IRA to fund your child's future college expenses. How are you guys currently planning? In California, do you guys have a program where you can pre-pay tuition to lock in today's rate vs 10 years down the road?

Why are you pre-paying tuition?  I thought your kids will go to Georgia Tech for free.

It doesn't work that way?  But you touted it as a reason to move to Johns Creek!  You should probably stop touting it if you don't believe in it yourself.

 

[momopi]

We don't have kid(s) yet.  But our plan is to put $ into RE investment properties.

If my kid(s) aren't smart enough to get scholarships, they can apply for student loans or go work for a company that pays college tuition (what I did).  Not saying that college will be the only path, if the kid has talent in something else then that might be OK too.  Our financial contribution will simply be keys to a house and a tube of gold eagles.

 

[AW]

Emancipate kids. Have them work as contractors for real estate related work. 1099.  And self directed IRA set up?

 

[panda]

WTTCHMN,
The HOPE scholarship is definitely a nice benefit for all GA residents as it greatly subsidizes the college expense . Both my wife and I would love to have our kids attend college nearby, but if they got into an excellent private school in the east coast I would like to support them. Personally, this is why I prefer the Roth and Real estate over the 529 to prepare for my children's future college expenses due to the flexibility that the 529 does not offer. I think that your children's college expense is going to be your second largest expense after your primary residence so it doesn't hurt planning for it now since many of us here are probably in our late 30s and early 40s.

That would be nice if both my boys got a full ride to Tech.....  Unfortunately, it doesn't work that way and it is difficult to predict that far out. They may not want to go an in-state school or may get into a top private school. 

Today the 4 years in-state tuition + room/board will cost you $98,992 per child and for out-of-state $176,208 per child, $200,000 for private school per child.  I would expect tuition prices to double in about 10 years when most of our children will be applying for college by then.

Just curious to see if any of you have set up a 529 plan?

Just curious to see if any of you have setup a 529 Education IRA, ESA (education savings account) to prepare for your children's future college expenses. Another alternative I have heard that you can use your Roth or IRA account to fund your children's college expenses before you are 59.5 without paying the 10% early withdrawal penalty if the funds are used towards education purposes which also includes books and room and board. This would give you more flexibility as the funds you do not use toward college expenses can be used towards your retirement income.

Do you think it is better to use your Roth IRA or a 529 Education IRA to fund your child's future college expenses. How are you guys currently planning? In California, do you guys have a program where you can pre-pay tuition to lock in today's rate vs 10 years down the road?

Why are you pre-paying tuition?  I thought your kids will go to Georgia Tech for free.

It doesn't work that way?  But you touted it as a reason to move to Johns Creek!  You should probably stop touting it if you don't believe in it yourself.

 

[panda]

Momopi,
I think that is a great plan. They way I see it, with RE investment properties you are pretty much self insuring your retirement plan. I think for a young family with one income earner, with little assets, a million dollar term life insurance policy makes a lot of sense since the insurance will provide for the family if the sole income earner suddenly passes away. The more income properties to self insure your passive income with, the less important the life insurance becomes.

If your son or daughter decides not to attend college, then you can pass on your real estate to them. If you continue to 1031 exchange and defer your taxes for both depreciation and capital gains and transfer them to your children, once you pass away... you will never pay any taxes on the depreciation taken or capital gains on the real estate you pass down to the next generation. 

Momopi, just curious to know what type of income properties you have purchased? single family or multi family?

What area have you been investing in and what type of Cap rate and cash on cash return are you getting on your Real estate investments?

We don't have kid(s) yet.  But our plan is to put $ into RE investment properties.

If my kid(s) aren't smart enough to get scholarships, they can apply for student loans or go work for a company that pays college tuition (what I did).  Not saying that college will be the only path, if the kid has talent in something else then that might be OK too.  Our financial contribution will simply be keys to a house and a tube of gold eagles.

 

[jmoney74]

buy a rental house!

 

[woodburyowner]

I opened a 529 in Utah's program since they have low fee Vanguard funds available (100% equity.  70% domestic, 30% international).  I started with 5k and then put in $300/month.  Hopefully this should cover the bulk of my kids college.  My goal was not to cover 100% with 529 due to the withdrawal rules and unknown cost component.  I wanted to put in just enough to take advantage of this investment vehicle without giving up too much flexibility.

Roth technique doesn't work due to income limits (pretty sure lots of people have this issue in Irvine).

 

[panda]

If you are filing jointly, your household income must be below $183,000 so you are correct that you cannot contribute to the Roth if you are above that level.

Perhaps the right thing to do is just contribute just enough to the 529 and have the Roth cover for any excess. Woodburyowner, I am curious to know why you are contributing to a 529 plan in Utah rather than California.

In California, are you able to deduct the your 529 contribution? In Georgia, you are able to deduct up to $2000 you contribute to your 529 plan on a annual basis. I am also a big fan of Vanguard funds as their fees are the lowest. 80% of the actively managed funds cannot beat the Vanguard Index 500 year after year.

 

[bones]

I have a Utah 529 too. Mainly due to low fees and vanguard funds as well. I don't think there's any CA tax benefits so there's no reason to contribute to a CA plan. I mainly just add the kids birthday and gift money to the 529. It's definitely one of the last buckets I fill.

 

[Bullsback]

I'm a Utah 529 as well. Fees are lower and better fund options than the state of CA and you get no benefit to being in the CA plan. Utah's 529 is regularly regarded as one of the best 529 plans in the US. 

 

[lnc]

An untaxing transfer of a ?529? - MarketWatch

 

[aquabliss]

We have a 529 Ameritrade plan (Nebraska I believe).

I also have a Coverdell plan which grows tax free for educational spending but allows you to buy any stock, etf, etc.

 

[panda]

It appears to me that the Utah and Neveda 529 programs are the best. Bones, Woodbury Owner, Bulls Back, and Aquabliss, I think that it is awesome that you  guys are planning ahead for your children's future college expenses. I like Nevada's 529 plan as it is affliated with the Vanguard 529 and has all the vanguard funds to choose from with the lowest fees. Even outside of the 529 plan, I believe that the Vanguard index 500 should be the foundation of their equity allocation as 80% of the actively fund manager cannot beat this index over 5-10 year horizon. For those of you who have not set up a Utah or Nevada 529 plan yet but have been thinking about it, I think there will be a great opportunity in the spring of 2016 where I believe there will be a substantial correction in the S&P 500 by March 2016. I would not advise anyone to buy the Index 500 at this time as the PE ratios are expensive.

Will anyone of you who currently have the 529 plan share how much you have contributed to the 529 plan so far and how many years you left before your oldest child applies for college. I like the Roth as an umbrella to the 529 and CSA. Your capital gains will be taxed as ordinary income and you will also be hit with a 10% penalty for any non-qualified withdrawal from the 529. Does anybody have the Nevada Vanguard 529 plan?

 

[Rizdak]

We have the Vanguard 529 Nevada plan and contribute $500/month. Used online calculators to guesstimate UC expenses by the time our kid is 18, as well as the monthly contributions needed for a full ride by then.

It appears to me that the Utah and Neveda 529 programs are the best. Bones, Woodbury Owner, Bulls Back, and Aquabliss, I think that it is awesome that you  guys are planning ahead for your children's future college expenses. I like Nevada's 529 plan as it is affliated with the Vanguard 529 and has all the vanguard funds to choose from with the lowest fees. Even outside of the 529 plan, I believe that the Vanguard index 500 should be the foundation of their equity allocation as 80% of the actively fund manager cannot beat this index over 5-10 year horizon. For those of you who have not set up a Utah or Nevada 529 plan yet but have been thinking about it, I think there will be a great opportunity in the spring of 2016 where I believe there will be a substantial correction in the S&P 500 by March 2016. I would not advise anyone to buy the Index 500 at this time as the PE ratios are expensive.

Will anyone of you who currently have the 529 plan share how much you have contributed to the 529 plan so far and how many years you left before your oldest child applies for college. I like the Roth as an umbrella to the 529 and CSA. Your capital gains will be taxed as ordinary income and you will also be hit with a 10% penalty for any non-qualified withdrawal from the 529. Does anybody have the Nevada Vanguard 529 plan?

 

[panda]

Rizdak,

Are you happy with the Nevada's Vanguard 529 plan?

I like to have my Roth IRA (first contribution was made when i was 21 years of age) as the umbrella for my 529 plan if it ever get exhausted sort of like an insurance policy. I personally think that the Vanguard 529 Nevada plan is among the best 529 plans out there. What amount did you come up with as the best guesstimate for your UC expenses by the time your child is 18. How many years do you have until your child enters college?

We have the Vanguard 529 Nevada plan and contribute $500/month. Used online calculators to guesstimate UC expenses by the time our kid is 18, as well as the monthly contributions needed for a full ride by then.

It appears to me that the Utah and Neveda 529 programs are the best. Bones, Woodbury Owner, Bulls Back, and Aquabliss, I think that it is awesome that you  guys are planning ahead for your children's future college expenses. I like Nevada's 529 plan as it is affliated with the Vanguard 529 and has all the vanguard funds to choose from with the lowest fees. Even outside of the 529 plan, I believe that the Vanguard index 500 should be the foundation of their equity allocation as 80% of the actively fund manager cannot beat this index over 5-10 year horizon. For those of you who have not set up a Utah or Nevada 529 plan yet but have been thinking about it, I think there will be a great opportunity in the spring of 2016 where I believe there will be a substantial correction in the S&P 500 by March 2016. I would not advise anyone to buy the Index 500 at this time as the PE ratios are expensive.

Will anyone of you who currently have the 529 plan share how much you have contributed to the 529 plan so far and how many years you left before your oldest child applies for college. I like the Roth as an umbrella to the 529 and CSA. Your capital gains will be taxed as ordinary income and you will also be hit with a 10% penalty for any non-qualified withdrawal from the 529. Does anybody have the Nevada Vanguard 529 plan?