Standard IRA and college

Will I be able to use a standard IRA to pay for college for my kids without any penalty? We have a few small IRAs that we stopped putting money into a few years ago in order to save money through my employers deferred compensation system. I am the sole earner and don't make enough to max out deferred comp and/or IRAs, so I am trying to decide on the best way to also save some money for college expenses. We have another 13 years yet before our first is college age.

Scott

Under current FAFSA guidance, all withdrawals from an IRA count as income in the determination of financial need. You want to be sure that you won't qualify for financial aid before deciding to use IRA as a primary college savings vehicle.

TJ

Okay, and that isn't the case with a Coverdell or a Roth?

Scott

It is for the Roth, but not for the Coverdell, as I understand current DOE guidelines. Neither the income component of withdrawals nor the withdrawals themselves from both Coverdells and 529s are not assessed for financial aid purposes.

TJ

In fact, it is opposite.

The ROTH will not be counted as an asset, nor will any retirement account. The assets in a Coverdell or 529 will be assessed at 5.6% of annual Expected parental contribution.

A Roth can also be owned by the prospective student without fear of being penalized.

Okay! I'll go with a Roth then.

Good choice Scott. The traditional IRA doesn't have the same liberal treatment toward education. Also, if the wunderkind decides against school, the Roth marches on to your retirement.

The Roth can also be used for your first home purchase if you hold it for or at least 5 years.

For tax treatment, the Roth is principle out first. This leaves the taxable growth for last.

If you had to choose just ONE investment vehicle in your life, it should be the Roth.

Pricespector - What I wrote was "true".

While the 529 and Coverdell are counted as assets, withdrawals - including the income components - are not included as either parental or student income in the assessment of financial aid.

It is true that a Roth, in anyone's name, is not counted as an asset. But (and this is a significant but not recognized/understood even by a lot of professionals) withdrawals from a Roth are assessed as income for the purposes of financial aid, regardless of whether the Roth withdrawal has a taxable component or not.

This is effective as of the most recent FAFSA and, of course, it may change at any time as the DOE reviews FAFSA policies on an annual basis, and this year the Higher Education Act is up for renewal.

TJ