Should I use a Roth IRA or 529 plan for college saving?[ Edited ]
HI, I have a few questions regarding investments for my son, I have a 3 year old. 1. Can I open a Roth IRA for him? 2. Can I use part of his Roth IRA for his education expenses? 3. If the goal is his education, which one is a better option: Roth IRA or 529 college investment? 4. I am living in VA, what is the benefit having 529 in USAA vs VA? Thanks
I think you are on track on a couple of fronts. First, you're getting a relatively early start on your education savings and second, you're focused on taking an approach that is tax advantaged. Since the goal is to build a fund for college education, I think a 529 college savings plan offers the most promise. Let's take a closer look at the two approaches you've suggested.
In order to make a Roth IRA contribution, you have to have taxable compensation that you report to the IRS. I would imagine it will probably be ten plus years before your son starts mowing lawns, babysitting or generating income in some way that would allow him to contribute to a Roth. That being the case, a Roth IRA in his name is probably not a great option to build up a college fund. I think it can be a great approach to get him started in the savings game once he is a teenager, but it's not ideal right now.
529 College Savings Plan
On the other hand, you could set up a 529 plan for your son today. One of the biggest advantages of this type of plan is its tax advantages. You won't pay taxes on the investment income within the account while you're accumulating for college and qualified withdrawals for education expenses are tax-free. These plans are also typically offer high contribution limits and convenient age-based investment options that become more conservative as your son gets closer to college-age. Since your goal is education, this plan is definitely worth considering.
As you evaluate plans, one difference you will see is that some state-sponsored plans offer a state income tax deduction for contributions made to that plan. For example, in Virginia a deduction of up to $4,000 per account is offered when calculating your taxable income for Virginia income taxes. Some states even allow deductions for contributions to other state's 529 plans.
Plans also differ based on a number of factors including contribution limits, plan fees and expenses and investment options. For example, a plan sold through a broker or agent may have an extra layer of expenses as compared to a direct-sold plan. The website www.savingforcollege.com is a good resource to use when comparing plans.
If you have additional questions related to 529 plans or USAA's offering, give one of our advisors a call at 800-771-9960. Good luck.