teenager saving for college - bank? Roth IRA? other?

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pondhockey
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teenager saving for college - bank? Roth IRA? other?

Post by pondhockey » Thu Mar 05, 2020 7:46 pm

My teens are looking ahead to college, and saving as much as they can from babysitting and summer jobs. I've found plenty of posts about parents savings for college (529 vs Roth IRA). And I've also found posts about getting kids started with Roth IRAs (not in reference to college). But I haven't seen anything about this question...

For teens saving a few thousand dollars per year for college, is there any advantage to them doing so within their Roth IRA vs. a high-yield savings account vs something else?

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Watty
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Re: teenager saving for college - bank? Roth IRA? other?

Post by Watty » Thu Mar 05, 2020 8:11 pm

pondhockey wrote:
Thu Mar 05, 2020 7:46 pm
something else?
I bonds would be a possibility but I am not up on the current rules for those.

LeeMKE
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Re: teenager saving for college - bank? Roth IRA? other?

Post by LeeMKE » Thu Mar 05, 2020 9:16 pm

They can't withdraw from Roth without having been on deposit for more than 5 years (I think 5 years is still correct).

So just a high yield bank account or CDs is all I can think of.
The mightiest Oak is just a nut who stayed the course.

MathWizard
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Re: teenager saving for college - bank? Roth IRA? other?

Post by MathWizard » Thu Mar 05, 2020 9:25 pm

LeeMKE wrote:
Thu Mar 05, 2020 9:16 pm
They can't withdraw from Roth without having been on deposit for more than 5 years (I think 5 years is still correct).

So just a high yield bank account or CDs is all I can think of.
Contributions can be taken from a Roth anytime.

Earnings would be subject to a 10% penalty and probably taxes.

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DrPayItBack
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Re: teenager saving for college - bank? Roth IRA? other?

Post by DrPayItBack » Thu Mar 05, 2020 9:50 pm

LeeMKE wrote:
Thu Mar 05, 2020 9:16 pm
They can't withdraw from Roth without having been on deposit for more than 5 years (I think 5 years is still correct).

So just a high yield bank account or CDs is all I can think of.
I do think it’s silly to put money in an IRA with the express intent of taking it out before retirement, but what you have said here is not correct.

akron1977
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Re: teenager saving for college - bank? Roth IRA? other?

Post by akron1977 » Fri Mar 06, 2020 3:54 pm

FAFSA rules would ignore Roth $ prior to the current year (they don't count retirement funds as assets) whereas the same $ in a savings account would be assessed at a 35% drawdown---kid assets highly "taxed" by FAFSA

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gr7070
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Re: teenager saving for college - bank? Roth IRA? other?

Post by gr7070 » Fri Mar 06, 2020 5:11 pm

Check out Vanguard balanced portfolios for their approach.

https://investor.vanguard.com/529-plan/ ... nd-returns

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CAsage
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Re: teenager saving for college - bank? Roth IRA? other?

Post by CAsage » Fri Mar 06, 2020 5:23 pm

Roth IRA in a Total Bond fund, assuming you then withdraw only the contributions to avoid penalties/taxes? Or a taxable bond fund (but there is the FAFSA issue...). If you did put it in a Roth IRA, I would plan on withdrawing it for the latter college years so it's sheltered longer. A 529 account might also be good, tax sheltered and you can use all the proceeds for college or to pay off college loans. A Bond Fund is likely to pay better than most saving accounts, just keep it short or intermediate (match the duration to the time frame, long term bond funds more volatile).
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.

The Broz
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Re: teenager saving for college - bank? Roth IRA? other?

Post by The Broz » Fri Mar 06, 2020 5:28 pm

Can't they open a 529 for themselves? I know I was able to open a 529 with myself as the beneficiary months before my son was born. After he was born, I just did a simple transfer to an account that has him as a beneficiary. Maybe there is a minimum age in order to open a 529 when you list yourself as the beneficiary?
Side note: We have our 529 with NY (we do not and likely never will live there), because they were one of the states that had Vanguard funds with no minimum to invest. Ohio is another IIRC. If they can meet some investment minimums, there are several states they can go to. They do not have to go to school in that state to use the money. Also - depending on your state, you may want to just stick with your home state for a small tax deduction. If the investment options in your home state's 529 plan suck, I would find a better state and forget the tax break.

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Re: teenager saving for college - bank? Roth IRA? other?

Post by DIFAR31 » Fri Mar 06, 2020 6:02 pm

The Broz wrote:
Fri Mar 06, 2020 5:28 pm
Can't they open a 529 for themselves? I know I was able to open a 529 with myself as the beneficiary months before my son was born. After he was born, I just did a simple transfer to an account that has him as a beneficiary. Maybe there is a minimum age in order to open a 529 when you list yourself as the beneficiary?
A UTMA/Custodial 529 account can be opened by/for a minor with the minor's money and the minor as the beneficiary. A custodian would need to be appointed and in control of the account until the minor reaches the state's age of majority. UTMA/Custodial 529 accounts are reported on FAFSA as a parent asset and therefore receive more advantageous treatment than other student assets when the EFC is calculated. Some schools that require CSS/Profile also follow this EFC methodology for institutional need-based aid, but you need to check this on a school-by-school basis.

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pondhockey
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Re: teenager saving for college - bank? Roth IRA? other?

Post by pondhockey » Fri Mar 06, 2020 7:00 pm

I really appreciate all the feedback. So it seems like:
  1. having the kids put their money into their own Roth IRA might be the most advantageous option, mostly because of FAFSA (and wait as long as possible before drawing it out). Plus, in the unlikely event that they won't need it, it just becomes part of their retirement savings.
  2. next-best option might be them opening their own 529, though that has some FAFSA implications
  3. or maybe I bonds though I'd need to look into that further
  4. and the least-advantageous option would be taxable savings/fund, because of FAFSA
Am I understanding this correctly? All new territory for me, so very grateful for the advice.

We'll also be helping them with the 529s we set up. But I haven't seen many posts about how to best handle the money THEY earn.

lakpr
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Re: teenager saving for college - bank? Roth IRA? other?

Post by lakpr » Fri Mar 06, 2020 7:08 pm

Is there a possibility that you can match their earnings, if they put it all in Roth IRA? Given that they are starting early, leaving money to grow tax free for nearly 50 years would be the best bang for buck ... so I am inclined to advise you to have them dump everything into Roth IRA and invest in Total Stock Market / Total International Stock Market index funds. I know that means they would need replacement funds for the education -- and that's where my question is coming from. Can you be a backstop for those funds while they are in college? DO you have the wherewithal to do so?

The Broz
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Re: teenager saving for college - bank? Roth IRA? other?

Post by The Broz » Fri Mar 06, 2020 7:13 pm

pondhockey wrote:
Fri Mar 06, 2020 7:00 pm
We'll also be helping them with the 529s we set up. But I haven't seen many posts about how to best handle the money THEY earn.
Maybe I am misunderstanding what you are asking here. I think it is perfectly valid to have a conversation with them about the money they earn, and come to an agreement on allocating that money for:
- Spending/enjoying
- Saving
- Giving

It is their money, but I think you want to help guide them and come to an agreement that everyone is happy with. Too much of one will be to the detriment of the others.

I remember the summer before college started, my mom had gotten me a FT job in her office. My original plan was to take one week off before I had to go away to school, and basically work the rest of the summer. During the summer, I decided I wanted to get a guitar and that I would work two extra days to pay for it. Also during the summer, my mom got very paranoid that my dad would not pay for school and made the decision that anything I made needed to be saved. I don't recall what I did, but I suspect I went back to taking the full week off. It seemed like a bad lesson to teach, since it was my money. I felt like I should have a say in what I do with the money I earn from MY work - especially when it was 2 days' worth of work over the course of 7-8 weeks.

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pondhockey
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Re: teenager saving for college - bank? Roth IRA? other?

Post by pondhockey » Fri Mar 06, 2020 9:16 pm

lakpr wrote:
Fri Mar 06, 2020 7:08 pm
Can you be a backstop for those funds while they are in college? DO you have the wherewithal to do so?
We'll be able to fund about half of their college costs, but for the rest they're on their own using loans and their savings.

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pondhockey
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Re: teenager saving for college - bank? Roth IRA? other?

Post by pondhockey » Fri Mar 06, 2020 9:22 pm

The Broz wrote:
Fri Mar 06, 2020 7:13 pm
Maybe I am misunderstanding what you are asking here. I think it is perfectly valid to have a conversation with them about the money they earn, and come to an agreement on allocating that money for:
- Spending/enjoying
- Saving
- Giving
Yes, we've been doing that since they were little and have taught them that charitable giving is high priority. They're good with their money, I'm just wondering how they can best set aside their college funds - in their Roth IRA, or 529, or bank account, or what. Seems like Roth IRA might be best from a FAFSA perspective, and then use those funds to pay for their last year of college. At least that's what I can gather from the advice here.

DIFAR31
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Re: teenager saving for college - bank? Roth IRA? other?

Post by DIFAR31 » Fri Mar 06, 2020 9:35 pm

pondhockey wrote:
Fri Mar 06, 2020 9:16 pm
lakpr wrote:
Fri Mar 06, 2020 7:08 pm
Can you be a backstop for those funds while they are in college? DO you have the wherewithal to do so?
We'll be able to fund about half of their college costs, but for the rest they're on their own using loans and their savings.
How much is half of their college costs? Without a parent or someone else cosigning a loan, the most a student can borrow on their own freshman year is $5,500 (unless the parent applies for and is denied a Parent Plus loan, which then adds I think $4,000 to the max first year federal direct student loan amount). Sophomore year max federal direct student loan = $6,500, Junior and Senior years = $7,500.

lakpr
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Re: teenager saving for college - bank? Roth IRA? other?

Post by lakpr » Fri Mar 06, 2020 9:44 pm

pondhockey wrote:
Fri Mar 06, 2020 9:16 pm
lakpr wrote:
Fri Mar 06, 2020 7:08 pm
Can you be a backstop for those funds while they are in college? DO you have the wherewithal to do so?
We'll be able to fund about half of their college costs, but for the rest they're on their own using loans and their savings.
I suggest opening Roth IRAs at Fidelity then, using their zero funds. Specifically zero funds because you need to maintain a Roth fund that is at least 5 years old, for future purposes, and I suggest you start it now. Open, invest in a money market fund in Roth, use the money for studies as you were planning to. But always keep at least $10 alive in the account. Let it season such that by the time your kids graduate, the 5 year clock for Roth has been met.

Vanguard wouldn't let you go that low in any fund.

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pondhockey
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Re: teenager saving for college - bank? Roth IRA? other?

Post by pondhockey » Sat Mar 07, 2020 1:00 pm

DIFAR31 wrote:
Fri Mar 06, 2020 9:35 pm
Without a parent or someone else cosigning a loan, the most a student can borrow on their own freshman year is $5,500 (unless the parent applies for and is denied a Parent Plus loan, which then adds I think $4,000 to the max first year federal direct student loan amount). Sophomore year max federal direct student loan = $6,500, Junior and Senior years = $7,500.
Thanks, I hadn't realized that. Not sure yet where they'll end up going but it looks like that ~$27k loan amount might be sufficient, along with our $50k contribution and what they'll hopefully earn before/during college. We'll see! Don't really want them taking on too much debt anyway, if at all possible.

gretah
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Re: teenager saving for college - bank? Roth IRA? other?

Post by gretah » Sat Mar 07, 2020 1:56 pm

I've been looking at Coverdell ESA accounts for my nephews' kids since I can't contribute to their 529s.

I think each Coverdell account can only accept $2k per year per child. This would be in addition to a 529 account.

You might do a search for Coverdell ESA.

JGoneRiding
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Re: teenager saving for college - bank? Roth IRA? other?

Post by JGoneRiding » Sun Mar 08, 2020 7:55 pm

Double check this but it was my understanding that you can withdrawal retirement funds for college without penalty. Which makes the Roth ideal if they are a few years out as until they take the money out the FAFSA is blind to it.

You just have to invest with care if course

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