529 Plans: Are they the best way to finance a college education?

The 529 is the most popular “college savings” program today, and has the greatest tax advantages.

However, it comes at a cost in that it is irrevocable, expensive to operate, inflexible in investment options, and although the “beneficiary” can be changed within a family (even a cousin), the funds are only “tax advantaged” if they are specifically used for education.  If they are used for anything else, then they become taxable and there is a 10% penalty.

ROTH IRAs can be used for college savings and are completely tax free.  There is no requirement that the funds be used for education.  However, it is probably more advantageous (if you are planning on giving the money in a Roth to a child) that the account be kept intact as long as possible because it is tax free for the owners life, and even possibly the heir’s life.  The longer it can grow the better, and since college happens relatively soon in a child’s life it would be better to finance college from another source and let the Roth grow as long as possible, maybe even into the child’s retirement!

It is our view that parents ought to begin saving BEFORE children arrive, and we don’t prefer the “silos” like 529s since they limit the use of the funds.  We would prefer the parent maintain control of the assets for any purpose, invest in growing companies and real estate over long periods of time (creating long term gains, many of which will be unrealized) and then “use” those assets by prudently borrowing against them in order to pay for college, or any necessary expense.  If they have saved 15% of gross income (our preferred rule of thumb for saving), outside of retirement plans, since before they had children, then they should have no problem accumulating the assets to then borrow against for whatever purpose that arises.

Continue Reading