As the cost of college has skyrocketed, students and/or parents have had to find new ways to pay for it. The average cost of attendance for a Louisiana university in 2019 is $21,880, while the cost for someone entering LSU in 2034 is projected to be $66,540 a year. Most parents have heard of a 529 education savings account, but some may not know that a Roth IRA could also be an effective way to save for college.
A 529 savings account provides tax-free growth and tax-free withdrawals if used for qualified educational expenses (QEE). Until the recent tax bill 529 accounts were only able to be used for college, but now may be used for K thru 12 expenses. 529 assets can be passed to a different beneficiary. For example, if one child decided to not go to college, you can then apply their 529 funds towards another child&rsquos education. There is no income restriction and parents, or grandparents can contribute $15,000 per child each year.
Many people know that a Roth IRA is an individual retirement vehicle, but it also could be an effective way to save for children&rsquos college. You put after-tax money into the Roth and after 5 years any withdrawal that does not exceed your total contributions can be withdrawn tax-free and penalty-free. Any account earnings withdrawn before 59 ½ will be subject to a penalty. However, you can withdraw money before 59 ½, including earnings, penalty free for qualified educational expense (QEE) like tuition, books, and room and board. To be eligible, the expenses must be for you, a spouse, child, or grandchild.
Unlike a 529, the leftover money in a Roth can be used during retirement with no tax or penalty consequence. In a 529 the leftover money can be switched to a new beneficiary, but any withdrawals not used for a qualified educational expense (QEE) will incur income tax and a 10% penalty to the account owner. Also, the maximum contribution to a Roth IRA per year is $6,000 and an additional $1,000 after age 50. There is also an income limit to who can contribute to a Roth. A single taxpayer whose income exceeds $137,000 (married filing jointly - $203,000) are not eligible to make Roth contributions.
Both Roth IRAs and 529s are great ways to save for college. If you have any questions about how you are saving for your children&rsquos college, please give us a call. Why choose Argent Advisors in Monroe?
Our mission is to help establish, manage, and protect our clients' financial plans, and we take that very seriously. The Argent Advisors team in Monroe has over 60 years of combined financial planning experience. No matter where your objectives fall, we help our clients establish a definitive goal-oriented plan for current needs and for the future. If you have any question about saving for college or any other financial planning need, please contact our office.