I have read a lot about the 529 and am somewhat versed on the IRA situation.I want to get the biggest bang for my buck and I would like to try to protect myself and my child as best we can from the Taxman.So between a 529, Roth IRA, Educational IRA, pure stock/mutual fund investing? I would like some feedback from someone about what they think overall would work the best. My household income is currently about 80K we do have some debt to clean up but my child is 1 and I would like to start to do something just to get it started and pointed in the right direction. I would also like an investment that I could increase the payment into it for another child but not have to have seperate accounts for each child.I am confused and would like a little direction from some Motley Fools.
529 plans offer a lot of benefits. They grow tax-free for as long as your money stays in the 529; distributions to pay for the beneficiary's college costs are federal tax-free. Generally you can put in much more money than into an E-IRA. 529 accounts are treated as an asset of the parent or other account owner in determining eligibility for federal financial aid, so they have less impact than an E-IRA or savings in the child's name. Also, some states have a state income tax deduction for the state's 529 plan. However, I do think you need to have one 529 account for each child. Once you set one up, it's pretty low maintenance.Retirement accounts such as Roth IRAs generally aren't considered in needs assessment, and you can withdraw your contributions without penalty. However, I'd want to use this only as a fallback. As soon as your kids are old enough to start earning money, they should start saving for college & future, and a Roth IRA might be a good option for them.Paying down consumer debt and prepaying your mortgage will also put you in a better position to handle college costs.
Well, I am certainly no expert. But I will share with you my thinking on the subject. I have about the same household income and 2 children (1 & 4). I choose the 529 route. I like the fact that the money is in my control. I decided against the Coverdale ESA, due to the fact that I don't want the money in my children's name to take a trip to Europe or something. If they decide not to go to college, I get the trip to Europe, minus the 10% penalty on earnings. Also, I like the fact that if your child gets a scholarship, you get that amount of money back. Thirdly, the money can be used at almost any college, so I would not be locked into using only public colleges, in my state, like I would have been with a pre-paid tuition plan. I chose T.Rowe Price, they do not charge an annual fee if you agree to monthly deductions, and they have a plan that will rebalance your portfolio each quarter until they get to college, so as not to put too much money at risk in the last years before college. (I haven't looked that closely at the other plans, but I would guess that they are all about the same)In addition to the 529, I am dollar cost averaging money into DRIPs. I will dollar cost average cash out of them before college time comes. I will take out what I think I will need for my oldest son's freshman year 5 years before that freshman year, then taking out what I think I will need for his sophomore year 5 years before. Etc.My reason for putting a part of the money into DRIPs is that I would like my children to get part time jobs, and pay part of their expenses, but I want to have the money available, if I think that they are in need of extra help. Also DRiPs are kind of a hobby for me, and I would like to see if I can get a better return than the mutual funds.I don't really understand why you say that you want to have one account for the child that you have now, and any future children. I have two 529's, and I have my investment withdrawn from my checking acount every month, and If my eldest son does not use the money in his account it can always be passed along to the younger son, or money can even be passed to their cousins if something unforseen werer to happen, and I wanted to give the money to them.
I have a similar situation to yours (80k, 1yr old) and this is what I've found out...Roth IRA is the best for your own retirment, but not as a college investment for your child unless you can withdraw the money without penalty at the time he/she is going to college. Does your Roth IRA withdrawal age coincide with your child's college years? Section 529 plan has the advantage that you can invest almost any amount (up to about 200K in most state plans). Thus, you can put $50 per month or more (I do $200) if you can in your account. The withdrawals are tax free staring in 2002 so it's just like a Roth or Ed IRA. The disadvantage is the company you choose will have limited investment options. It's usually an age based strategy where a higher percentage invested in stocks when your child is young and a higher percentage in bonds in the older years. Also, check the fees. Some state plans have relatively low fees while others are over 1.5%. An excellent site to check out is Savingforcollege.com. It describes every state plan.The main advantage of an Ed IRA is the flexibility of investment choice. You can invest in an index fund, stocks, etc. If you are a savvy investor you can do better with this approach than with a 529 plan. The other advantage is that you can use ED IRA $ for high school expenses as well. The biggest disadvantage is the low yearly contribution limit and the potentially high fees. For example, if you invest $2000 you may have a custodial charge ($10), and acount maintainance charge($10) in additon to the fees inherent in your investment if it's a mutual fund or stock. Fees could reach 2% if you don't inquire beforehand. For me, I am using my Roth for my own retirement needs and hopefully to help out my kids in other financial ways besides college. I am investing in both the ED IRA and a Section 529 plan. My 529 plan is primary and my ED IRA is a supplement.If you had to choose, I'd say 529 over ED IRA now. Of course, they could always change the tax laws in the future so you never know which will be better in 20 years. Good luck.
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