Vanguard leaders look at the pros and cons of saving for a child’s education


What are the pros and cons of saving for a child’s education through a Roth IRA versus a 529 Savings Plan? Vanguard retirement investment strategist Maria Bruno and Certified Financial Planner™ professional Kahlilah Dowe discuss specifics for both saving methods, including contribution limits, fund usage, and the impact on financial aid.

Notes:
  • All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.
  • For more information about Vanguard funds, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.
  • This webcast is for educational purposes only. We recommend that you consult a tax or financial advisor about your individual situation.
  • Withdrawals from a Roth IRA are tax free if you are over age 59½ and have held the account for at least five years; withdrawals taken prior to age 59½ or five years may be subject to ordinary income tax or a 10% federal penalty tax, or both. (A separate five-year period applies for each conversion and begins on the first day of the year in which the conversion contribution is made).
  • Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor.
© 2017 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor of the Vanguard Funds.  



TRANSCRIPT

 
Amy Chain: Joe is asking specifically about the flexibility of a Roth IRA as it applies to using the proceeds to fund a child’s education expenses.

Maria Bruno: Yes, there’s a couple of things. First, I would start off by thinking about if you’re making the decision of how to save for a child’s education, think about a 529 maybe first. So a 529, essentially, is a Roth for college, and there’s more benefits there in terms of higher contribution limits, unlimited participation. Many states offer a state deduction or credit on contributions. So those are specifically earmarked towards college funding and there’s benefits there, so don’t discount the 529 as a primary college savings vehicle.

Amy Chain: I’m going to take you on an aside there. Can grandparents contribute to their grandchild’s 529?

Maria Bruno: Yes.

Amy Chain: Good.

Maria Bruno: And as Kahlilah had mentioned, you don’t have to worry about— Because there’s unlimited participation and the contribution limits are so high, you don’t have to worry in terms of, well, did the parent also contribute or whatnot, so you can have different 529s. So there’s an attractiveness there. The question often is, is, “Okay, well I have a Roth, a parental Roth, can I use those assets to fund my child’s education?” And, essentially, a lot of what we talked about earlier this evening applies there in terms of being able to access the contributions income-tax-free and penalty-free. There’s also a benefit to if you are making withdrawals specifically towards postsecondary education expenses, then those funds could be accessed penalty-free, for instance. So there are some benefits there that may qualify as a qualified withdrawal. So there’s some flexibility there and, yes, it can work. I mean I think it’s the decision of, okay, I have these types of accounts, which do I pull from? The other thing I would think about too is the impact on financial aid. So parental Roth assets, for instance, may not negatively impact financial aid; however, any withdrawals from a Roth are considered income in the financial aid calculation, even though the dollars themselves may not be subject to income tax. So a few things to think about if you are actually taking withdrawals from your Roth to fund your child’s college education.

Important information All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss. For more information about Vanguard funds, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing. This webcast is for educational purposes only. We recommend that you consult a tax or financial advisor about your individual situation. Withdrawals from a Roth IRA are tax free if you are over age 59½ and have held the account for at least five years; withdrawals taken prior to age 59½ or five years may be subject to ordinary income tax or a 10% federal penalty tax, or both. (A separate five-year period applies for each conversion and begins on the first day of the year in which the conversion contribution is made). Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor. © 2017 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor of the Vanguard Funds.