Contributed by: Matthew E. Chope, CFP®
Congrats – you have a new grand-baby on the way! During all the excitement, the reality of the future may set in: future education expenses. “Where is one of the best places to save for our unborn grand-baby?” This very question was asked by a couple in their mid-50s a few weeks back. They have modest income, earn about $100,000 a year, and are currently funding retirement based plans at work. Furthermore, they take advantage of the full match by their employers and benefit from a deduction at the 25% bracket. The folks that asked the question will most likely not be in the 25% bracket during their non-working years of retirement. So, they likely are correctly benefiting from the personal tax arbitrage within their income brackets now vs the expected future. These folks are working towards being on track for retirement by 68 which is a little longer than most trying to achieve such a goal. But they are doing OK with that timeframe and are working as long as they need to. They also have some limited discretionary income remaining ($200-$300 a month) to save for this new goal of potential education for future grandchildren.
Why a Roth IRA might be better than a 529 Plan in this situation:
In this case, while both vehicles provide tax-free growth, the Roth IRA can help provide added flexibility.
There is no impact on the FAFSA (Free Application for Federal Student Aid) calculation with the Roth IRA (there is generally no impact with a 529 if a grandparent is the owner of the account, but if the owner is changed to a parent, that could have a negative impact just about the time you don’t want it to!).
There is generally more investment flexibility with the Roth. There are more investment options offered and 529s are limited on the number of trades allowed on an annual basis.
Probably one of the largest benefits for the Roth IRA is that you don’t have any tax or tax penalties if the grandchild decides not to go to school, or if the money is needed for an emergency or for your retirement safety net instead.
College saving is never one size fits all. Please contact us with assistance in helping to determine the most suitable college savings strategy to help implement for your family. We are always happy to help!
Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc.® Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions.
The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Mathew Chope and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. The tax implications can vary significantly from state to state. Investments mentioned may not be suitable for all investors. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.