Roth IRA or 529 investment account?

I am 32, divorced and have two kids (one 9, one 11). I have begun putting about 6K into my 401K this year. I am planning to put about 3000 per year into a 529, but am wondering if I am better off contributing to a Roth IRA instead. I know with the Roth IRA, you can withdrawal for higher education without penalty for the amount you put in since it was already taxed. If I put it into a 529, it would be pretax, but I would pay a 10% penalty if my children either got a scholarship to school or did not attend for whatever reason. As bad as taxes are now, I figure they will be worse 10 years from now.

I guess you can't roll a 529 into a Roth IRA, can you? If not, which do you think I am better off with.

Theoretically, my ex and I would be going half in so we should be ok (unless they want to go to Harvard - then all bets are off. Ugh.)

Do you know that this is actually a trick question? (as there is no "yes" or "no" answer for this.) The answer depends on your situation. And to understand the answer, you MUST understand the difference between the two plans. Specifically:

* same: contributions to both are after-tax (different from 401K, for example)

* different:
- Roth's contribution is tax-free; however, Roth's gain is taxable as income until your later years (after 59.5 yr-old)
- 529 plan's contribution & gain are both tax-free, as long as you use both for college education. Otherwise, the gain might be taxed as income or penalty might kick in.
- Roth eligibility depends on your income; 519 plan does not (but it has cap on maximum contribution, annual as well as lifetime, depend on the plan.)

There are also many other differences, but you can see that from the above, decision might be a bit tricky. For some folks whose kids will need the money when they are 59.5 yr-old or older, Roth IRA can be a powerful vehicle to prepare for both your retirement and your kids' college fund. But your situation is not that (you are 32 now and will be around 40-45 when your kids go to college.) So my recommendation is to actually not confuse between the two. Going half/half is possibly the right advice for you at this time. If you can max out your Roth contribution and put the remaining in 529 plan, it will be the best :-).

More about this exact question, please read http://www.savingforcollege.com/529_mont...

This may sound selfish, but you should really plan for your retirement now. Your kids will find way to get an education via student loans. Report It

If not maxing the Roth already then that is the preferred move.

For the kids higher education expenses, I would definitely use the 529 plan. The 529 plan tax benefits trump the Roth IRA plan specifically (and only) for higher education expenses. If paying the higher education expenses of your children is the intended use of the funds, then use the 529.

The 529 plan allows you to invest pre-tax dollars, allowing you to compound your earnings in pre-tax dollars as well. Additionally, 529 earnings grow tax-free as all withdrawals for qualified higher education expenses at any accredited college (including tuition, room & board, books, supplies) are all free from federal taxes.

It is wise of you to begin planning early!

These are completly different accounts with completely different objectives.
*The 529 plan is only to be used for education expenses. There is that 10% penalty if you try to use it for anything else.
*The Roth IRA is a retirement plan for you. You can access some money for education expenses, but it's not meant to be a college funding vehicle.

No, a 529 cannot be rolled over into anything else.

Your ex-wife is not allowed to make any contributions to any type of IRA that you own. If she is putting money aside, she may contribute to her own type of IRA and/or a 529 plan for the kid(s).

With the Roth IRA, you can withdraw your contributions without penalty at any time for any reason, as long as all of the earnings remain in the account. For example, you put in $5,000 and in two years it increased in value by $1,000 to a total of $6,000. You can take the $5,000 for whatever you want (college, groceries, a beat-up Mustang) without a penalty or taxes being due. The $1,000 in earnings must stay invested in the account to avoid the penalty or any taxes, until you are 59.5 years old or become disabled, etc.

Lastly, it is commendable that you want to help with the college expenses for your kids. Keep in mind that they should also plan on working toward the payment of the costs. Almost anyone can get some sort of student loan. The payments won't kill them (except Harvard!), and like me, they will have a greater sense of accomplishment knowing that they worked just a bit harder to get the most of the experience.

They can always borrow for college and pay it back later. You can't borrow for retirement, since you won't have income to pay it back.