To Roth or Not to Roth for College Savings?

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SkierMom
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To Roth or Not to Roth for College Savings?

Post by SkierMom » Thu Sep 04, 2014 1:56 pm

Good article here from Vanguard's Maria Bruno.

http://vanguardblog.com/2014/08/22/to-r ... e-savings/

Point of clarification I have, can I take out the contributions we've made to our children's 529 accounts without penalties (tax penalties or general penalties otherwise) just like a Roth?

letsgobobby
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Re: To Roth or Not to Roth for College Savings?

Post by letsgobobby » Thu Sep 04, 2014 1:58 pm

SkierMom wrote:Good article here from Vanguard's Maria Bruno.

http://vanguardblog.com/2014/08/22/to-r ... e-savings/

Point of clarification I have, can I take out the contributions we've made to our children's 529 accounts without penalties (tax penalties or general penalties otherwise) just like a Roth?
No, all withdrawals from a single custodian are pro-rated.

livesoft
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Joined: Thu Mar 01, 2007 8:00 pm

Re: To Roth or Not to Roth for College Savings?

Post by livesoft » Thu Sep 04, 2014 2:02 pm

Two things about the article that I didn't like:

1. One should contribute to a Roth regardless before contributing to a 529 plan. I wish she would have explicitly said that. She left it that folks might use their Roth contribution and contribute to a 529 plan instead. I would not do that myself. In particular, the non-wealthy might do that. That's really bad for them.

2. She mentioned " earnings grow tax-free" as if that's the only thing these accounts can do. What about the losses? One can lose money investing in a 529 plan or in a Roth.

@SkierMom, if the 529 plan has no gains, then it can be cashed in without penalty. In some circumstances, one can even get a tax deduction by claiming the loss on one's tax return.
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Choy
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Re: To Roth or Not to Roth for College Savings?

Post by Choy » Fri Sep 05, 2014 3:30 am

livesoft wrote: @SkierMom, if the 529 plan has no gains, then it can be cashed in without penalty. In some circumstances, one can even get a tax deduction by claiming the loss on one's tax return.
To clarify this and what letsgobobby stated, only earnings incur a 10% penalty + income tax. However withdrawals are pro-rata so you cannot separate your contributions from any earnings to avoid the penalty. Additionally, if you took a tax deduction on any contributions, you need to pay that deduction back.

dickenjb
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Re: To Roth or Not to Roth for College Savings?

Post by dickenjb » Fri Sep 05, 2014 6:04 am

Choy wrote: To clarify this and what letsgobobby stated, only earnings incur a 10% penalty + income tax. However withdrawals are pro-rata so you cannot separate your contributions from any earnings to avoid the penalty. Additionally, if you took a tax deduction on any contributions, you need to pay that deduction back.
Recapture of deductions is state specific. Some do, some don't. And it is the state you live in, obviously, not the state of the plan as that is where you took the deduction.

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