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Use Your Roth IRA as a College Savings Tool

Many people do not have the financial resources to save enough for retirement and college for their children. Often, people will add to college accounts and neglect their retirement savings. While it is noble to think of your children before yourself, you can actually do both at the same time. You can add $6,000 per year (or $7,000 if 50 years old or more) to a Roth and another $6,000 per year (or $7,000) for your spouse, assuming you qualify under the income rules. Let’s say you save the max for you and your spouse for 18 years, while under 50 years old, you would have $216,000 just in principal! That does not take into account that the amount you can contribute increases depending on the rate of inflation.

While a Roth IRA was meant for retirement by law, it has rules that make it a useful tool for college savings. First, with a Roth IRA you are able to take the principal out at any time with no penalty or tax! For qualified education expenses, you can take the principal out penalty and tax free, but the earnings are taxed as ordinary income. If your child does not go to college, gets a scholarship, joins the military or you are having financial hard times, you can access those funds for other reasons and possibly get financial aid for your children. There is a lot of flexibility. When you have limited resources, flexibility is important and provides a safety net for the family.

Another benefit of contributing to a Roth as opposed to a §529 plan is the rule to decide eligibility for financial aid. Assets in an IRA or Roth IRA do not count towards calculating financial aid. Only when money is withdrawn from an IRA is it counted as the parents’ income in financial aid determinations. Money in a §529 plan is counted against the financial aid calculation, although at a favorable rate, depending on whether the parent or grandparent owns the account. Money in an UGMA/UTMA counts as the student’s asset. How these assets are counted has changed many times and probably will change again, but I would bet that retirement assets in the future will still count more favorably than education savings.

The moral of the story is that a Roth IRA gives you flexibility.

Here’s an example: Let’s say your children are just about to start college and you have paid off all your debts and you now have ample income to pay for college! Why even touch the Roth? Now instead of having a bunch of money in a §529 plan that will have to be taken out, you have a huge IRA that you can use for retirement while keeping the favorable tax status.


Guest Post Written by:

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Leon LaBrecque, JD, CPA, CFP®, CFA
Chief Growth Officer of Sequoia Financial

High impact enrichment for our clients and potential clients is my personal mission as Chief Growth Officer at Sequoia. I’ve long been driven by intelligent planning and financial literacy for all, and the combination of the two allows us to reduce uncertainty so our clients can focus on doing what they love, instead of worrying about tomorrow. We’re on the cutting edge of a diverse range of planning tools, growth, and wealth management strategies. I use these tools to ensure business owners and individuals alike receive the very best in investment and wealth management services. We are continually growing our breadth and depth of client offerings to connect clients and potential clients to new and expanded opportunities for growing their wealth, protecting future resources, and propagating financial literacy through families and our communities.

I strive to serve our clients with high-impact results, added value, and real-world knowledge to help them meet their financial goals. Building real relationships allows me to truly help them manage their money more effectively. I thrive in thought leadership, knocking down complexity so that making smart choices is simpler.

Learn more about Sequoia Financial here: https://www.sequoia-financial.com/