Pros and Cons of Saving for College via 529 / Roth IRA / Brokerage Accounts

Pros and Cons of Saving for College via 529 / Roth IRA / Brokerage Accounts

Are you planning on saving for your child's education? Here are the pros and cons of using 3 different types of accounts.

529 Account:
This is the most popular type of college savings vehicle and widely viewed as the most efficient.

Pros:
>Post-Tax contributions grow tax-free
>If earnings are used for qualifying educational purposes, there is no tax or penalty on the use
>Up to $10,000 can be used annually for qualifying secondary school
>Some states offer a tax deduction up to certain thresholds

Cons:
>Limited investment choices (as opposed to a Roth IRA or brokerage)
>If money is withdrawn for non-qualifying educational purposes, a 10% penalty and income taxes are applicable

Roth IRA Account:
This account is very popular in retirement planning, and can also be useful in education planning.

Pros:
>Post-Tax contributions grow tax-free
>If earnings are used after reaching age 59.5 and the account has been opened for 5 years, there is no income tax on accumulated earnings
>Contributions can always be withdrawn for any reason, tax and penalty free
>If earnings are withdrawn for qualifying educational purposes, the 10% penalty will be waived (although income taxes will apply on the earnings portion)
>Investment options are not limited (as they are with a 529)

Cons:
>If earnings are needed for education expenses, they will be taxed
>There is an annual contribution limit to Roth IRAs (2024 the limit is $7,000)
>There are income caps for Roth IRA eligibility

Brokerage/Non-Qualified Account:
This is a general investing account used for multiple purposes.

Pros:
>No limit to contributions
>Investment options are not limited (as they are with a 529)
>Funds may be used for any reason without penalty
>Capital gains taxes apply on the earnings (either 0%, 15%, or 20% for long term gains)

Cons:
>Capital gains taxes apply on the earnings (this is both a pro and a con. The long term rate is generally less than ordinary income tax rates for a taxpayer, but there is tax nonetheless)

While 529 accounts are most advantageous, they are not the only way to save for college. Roth IRA accounts and taxable brokerage accounts have useful benefits as well. #529 #rothira #collegeplanning

Consult your financial professional to determine the best way to prepare and save for college costs.

-Your Friends at Red Oak Financial Group