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Q: I read that I could use the IRA money without penalty to pay for college expenses. Is this a better way to save for college than a 529 savings plan?
It is true that you can use your IRA to cover college expenses without paying an early withdrawal penalty. However, this approach has advantages and disadvantages compared to conventional savings methods such as the savings plan 529.
For example, your 529 savings plan may offer a double taxation advantage at the state level. Many states allow savers to deduct their contributions on their tax returns in addition to the benefit of tax-free withdrawals. In addition, 529 contribution limits (in excess of $ 400,000 in many cases) are much higher than annual IRA limits ($ 5,500 in 2018).
In addition, IRAs allow you to use money for purposes other than education. If your child is receiving a scholarship, is not going to university or does not need all the money, you can just let him grow up in the lap of your retirement. With a 529, you will be penalized by 10% for withdrawals not related to education.
Plus, with an IRA, you can invest in virtually any stock, bond and fund you want – you are not limited to the investment choices of your 529.
In conclusion, if you decide that using an IRA for your university savings is what suits you, I suggest using a Roth IRA. Traditional withdrawals from the IRA are considered taxable income, and a large withdrawal for college expenses could easily catapult you into a higher tax bracket – especially if you still work while on the job. your kids are in college.
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