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The Roth IRA

Students with Retirement Plans

A retirement plan…for college? You may be surprised to find that the Roth Individual Retirement Account (IRA) is one of the best options for saving money for, even if a you’re not near retirement. Roth IRAs are a good option for parents interested in opening up a college savings account, and putting away for retirement.

Larger IRA’s have greater earning potential. A 5% interest rate on $100 is greater than a 5% interest rate on $50. This is why combination accounts such as the Roth IRA will profit more than separate accounts. If you’re worried about using up your retirement fund on your child’s college education, a separate account is always an option.

Although Roth IRA deposits are not tax-deductible, they grow tax-free. They can also be withdrawn tax-free under certain conditions. Five years after the account is opened, the deposited sum can be withdrawn without penalty or taxes. A withdrawal of the earnings from that deposit will be taxed. Before the five-year mark, withdrawals will be penalized by 10% unless they are used for qualified expenses such as education.

Money used for education can be taken out of an IRA without a penalty fee. Unfortunately, any profits made from your deposit will be taxed. For example, if a parent deposits $5,000 into their IRA, and the money grows to $7,000 before 5 years, the parent can withdraw the initial $5,000 without a penalty fee. The additional $2,000 will be taxed. After 5 years, there are no fees or restrictions.

Unlike 529 plans and Coverdell accounts, money from an IRA can be used for anything after 5 years. Even young investors appreciate having leftover money that will grow tax-free and allow for greater spending freedom.

Once a student graduates, they can take advantage of the first-time homeowner rule to take out tax-free funds. Money withdrawn from an IRA to buy a home before age 59 ½ is tax and penalty free.

Keep in mind that like 529 plans and Coverdell accounts, there are spending restrictions on goods bought before 5 years. To avoid a penalty, the amount of money spent on education cannot exceed the cost of tuition, housing fees, and books.

Roth IRA accounts are the best options for those looking to save for college and put away for retirement. Older parents will benefit most from this plan. At the age of 59 ½, withdrawals are tax-free and penalty-free, with no spending restrictions.

For more information on the Roth IRA, visit: http://www.irs.gov/retirement/article/0,,id=137307,00.html

Last Edited: November 2015

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