Use a Roth IRA as a college savings fund?

I was considering using a Roth IRA as a college fund for my now 2-year old daughter. My idea was that after 5 years, the money invested can be withdrawn without penalty for college expenses and if she ends up not going to college or not needing it all, it can remain a retirement fund for me.
Does this sound like a good idea? Pros? Cons?

The Roth IRA would be in my name so that if the $$ is not used for her college, it can be used for my retirement.

Sounds reasonable... I believe only " the contributions" can be withdrawn ( not the gains) but you should have quite a bit in there in 15 years...
Of course if she goes to William & Mary, you'll be broke after the first year !!

The negative thing about having college funds set up in the child's name is that it will hinder their ability to get "need-based" scholarships.

Yes, in a Roth IRA the funds can be withdrawn without the additional 10% penalty, but any earnings distributed would be taxable at your current income tax rate.

If you have more than enough retirement savings, then it isn't a bad plan. But if you are in a (relatively) high tax bracket, the taxes you pay on those early distributions from your Roth may hurt. It will also set your retirement savings back and you'll have to repay yourself.

With a 529, your qualified distributions (earnings included) are federally (and many times also state) tax free. 529s are also not considered student assets, so shouldn't affect FAFSA or grant eligibility.

The obvious shortfall of the 529 is that you can only use it for qualified education expenses, but the contribution limits are also more flexible for a 529 than a Roth IRA and you can also have family members and others contribute to a 529 for your daughter (grandparents' gifts, etc.).

Max out your Roth IRA for your own retirement and contribute what you can in excess to a 529. If your daughter doesn't end up going to school, you can transfer the beneficiary to someone else (another child or relative) or use it at an accredited institution for yourself - maybe post-retirement classes?

Oops... a couple problems, Kim...

First, for a ROTH IRA, I believe there is not an exception for higher education expenses (there is for a TRADITIONAL IRA, but not a Roth -- stupid Congress screwed things up.) That is according to CCH Financial website I often use for reference on these things...

Another problem is that the education expense has to be for YOUR education to qualify for the exception (not your daughters). That's because the IRA is yours not hers, so the exception for withdrawals only applies to you.

My suggestion would be to check out a 529 plan to contribute for education. You get a tax break for contributions, the money grows tax free for college for your daughter, and if she doesn't go to college, you can assign it to someone else (including yourself for college or other classes YOU might want to take).

Good luck.

Hmmm .... perhaps. But, IMO, the Roth IRA accounts are really set up to benefit your retirement. There are tax-advantaged college 529 plans that allow you to invest for college. And if you child does not go, you can take the money out, paying taxes on them.

The biggest effects of compounding are from the contributions you make in the early years. Download a free copy of my book at http://www.invest-for-retirement.com and go straight to chapter 3, where I talk about comounding. It might change you mind on the subject.

no the 529 plans are your better option the roth ira is for retirement the 529 is a college plan.