Posted by Tim Thompson CPA PLLC

How To Take Advantage of IRA for College Savings

How To Take Advantage of IRA for College Savings

Nowadays, education is quite expensive. The average cost of a four-year course on public university at the present is about $75000 which indicates that you can anticipate a doubled value (over $150000) the time when it is turned for your young child. Moreover, the overall college expenses for having one or more children or choosing a private school could rise up to the price of your house or more.

What is the most effective way to save?? Luckily this is America in which there are various options to choose from. A mutual fund is one of these, it has an enticing development potential although it might eventually lead you to heavy tax payables. This is the reason why several individual shifts to tax relief investment mean such as Roth IRAs and 529 college savings plans.

College Savings Options Comparisons

How the tax benefits work:

Roth IRA

The principal portion (the amount you put in) of Roth IRA can be withdrawn whenever and for whatever reason, it is free of tax at the same time there will be no penalty for it. The moment you reach the retirement age is the only way you can withdraw it free from tax and penalty. Note that any gains from the account are free of tax. Roth IRA’s primary advantage is that allotments are not taxed as gain unless the full principal remainder is withdrawn. It implies that the moment you reach the age of 52.5, it is possible for you to withdraw the entire principal amount along with its gained portion free of tax.

529 College Savings Plan

It provides free of tax investment progress and withdraws if the money is being utilized to fund eligible higher education costs.  If an un-eligible withdrawal was made, the gain portion will incur a 10% penalty and become taxable income. Contrary to Roth IRA wherein each allotment comprises both gains and contribution portion.

Take note that an individual who is residents of above 30 states is qualified to further state tax credit claim or deduction for 529 plan funding.

Income and contribution limits:

Roth IRA

$6000 in the highest contribution value of Roth IRA a married couple who have a combined Modified Adjusted Gross Income (MAGI) of not more than $196,000 and $124,000 for individuals can avail.  While Roth IRA is not available for couples having $206,000 MAGI or more and individuals who have $139,000. Note that individuals who are in their 50’s are allowed to make $1000 each catch-up contributions. 

529 College Savings Plan

There are no restrictions on the contributions of 529 accounts, all income levels can participate. In addition, there is no capping for the yearly contribution and deposit, there is also yearly tax exclusion for individuals who have $15,000 and $30,000 for married couples combined filing. If you wish to lessen the gift tax exposure with the use of gifting, you can either choose to contribute $ 15,000 and $75,000 within 5 years. Frequently grandparents utilize this inheritance planning approach in making sure of the appropriate usage of their heirloom.

529 plans also have lifetime contribution cap starting from $235,000 through $500,000, but take note that each state has different limits.

Effect on federal financial aid:

Roth IRA

The Free Application for Federal Student Aid (FAFSA) does not include retirement accounts as assets, which implies that the amount of the Roth IRA will not affect the chance of qualifying for financial support. 

Nevertheless, FAFSA will consider the withdrawal of a specific amount from Roth IRA to cover the college cost as non-taxable earnings. It is said to be that earnings have a greater effect than assets on qualifying for financial support. 

529 College Savings Plan

FAFSA, on the other hand, considers 529 college savings plan value as parental assets, it does not matter if it is an account held by one of the parents or by the dependent student.  The calculation of EFC is based on the parent’s asset, in which 5.64% will be utilized to cover for college costs. That is a lot less than the student accounts that are evaluated as 20 % which are considered as an asset. Note that lower EFC indicates higher financial support. 

529 parent or student held accounts are not subjected to the federal income tax return and must not re-inserted to the reporting year’s income on the FAFSA’s subsequent year. Always remember that this privilege is not applicable to 529 plans held by grandparents and other relatives.

Tim Thompson CPA PLLC
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