This time of year brings about the often tough discussions regarding funding education for recent graduates and their families. Most households do not think about setting aside money until their loved one is close to having to pay for education. Families can minimize this concern and be more proactive. They can use a 529 College Savings Plan, a Roth IRA, a Traditional IRA or an Education IRA, to name a few. Families need to be aware that there are pros and cons of each option.
The 529 College Savings Plan is the traditional method used for educational savings, state-sponsored plans that allow for tax-free growth of invested funds. Each state, except Wyoming, has a specific plan and each plan has different features and benefits. While they are tax efficient because you can withdraw funds from the plan for qualified educational expenses on a tax-free basis, they do have limitations as well. The eligible items that qualify for the beneficial tax treatment are well-defined.
Using an IRA (any of the various types) is also a viable option for families. Because IRAs are tax-advantaged “retirement” accounts, the discussion needs to be more detailed about the benefits and limitations. Traditional and Roth IRAs are primarily retirement vehicles that have the flexibility to pay for qualified educational expenses under certain conditions. The main concern is that these are retirement vehicles and drawing from them can impact a household’s retirement outlook. Educational IRAs have a similar profile as the others, but they are exclusively designed for education.
Several options should be considered when planning for education expenses. Each needs to be considered in the full context of the total financial needs of a household. Contact your financial advisor for more details on how to determine the best course of action.
