|
Dear Plain Finances,
The ROTH IRA is interesting to me...and I have heard
that you can use it for saving for college.� How
would this work?�
From a Compilation of Readers
Dear Readers,
The ROTH IRA is the most flexible investment vehicle you
will find.� If you are not using it already, start
right away! Let's find out more...
|
| Pay
attention if: |
You
are needing a way to fund college education (your kids
or yourself) |
| The
Plain� Summary
|
The
ROTH IRA allows you to withdraw all contributions tax
free if you use it for college.� |
|
|
A
Quick Summary of ROTH
So,
what is a ROTH IRA?� It�s an account that you set
up at a bank or brokerage firm, much like the checking
or savings account that you now have, except that you
can put mutual funds, stocks, CDs, savings bonds...even
precious metals...into the account.� The specific
purpose of this account is for saving for retirement.�
(For more details, go to www.plainfinances.com/manage/roth.htm).�
You
can contribute $2,000 a year per person into the
ROTH.� Your spouse can contribute and additional
$2,000 as well, if you are married.� The only
requirement (basically) is that you have to be making
under $95,000 as a single person...or $150,000 as a
married couple.� (You can still contribute if you
make up to $110K as a single, or $160K married, but the
contribution amount goes drastically down...and if you
make over these amounts, you can't use Roth.)
The
best benefit of the ROTH is that your money grows
tax-deferred as long as it is in this account.�
And, you can withdraw the amounts that you have
contributed at any time for any reason (not just
college) without any tax penalty (some restrictions
apply).�� Only if you start withdrawing the
earnings of the account (not what you have contributed)
will you be subject to any tax....and even this amount
is only subject to ordinary income tax!�� The
only minus...contributions to the ROTH are not
tax-deductible...but it is really a small price to pay
for this most useful tool!
Paying
for College!�
Now, let's get down to specifics.� If you are a
married couple, you can put away up to $4,000 per year
with a ROTH towards saving for your child's
education...and it is all tax-deferred!� You can
withdraw all contributions you have made (when your
child reaches college age) to pay for college...or you
can fund your own college tuition with it!� And,
again, you won't have to pay taxes on anything during
the whole life of the ROTH until you withdraw on the
earnings additions of the account (the money that you
have made on interest, dividends, etc.).� Let's go
through an example:
Gary
& Cassi start saving for their daughter Diane's
college fund when she is 9.� They put in the
maximum $4,000 a year, every year, until she reaches 18.�
Their IRA funds, together, have earned an average of 10%
each year.
Their
funds look like this after 10 years:
|
�
|
Gary's
ROTH fund
|
Cassi's
ROTH Fund
|
TOTAL
in ROTHs
|
|
Total
Contributions for 10 years
|
$20,000
($2,000 * 10)
|
$20,000
($2,000 * 10)
|
$40,000
*
|
|
Earnings
on Contributions for 10 years (avg. 10% per
year)
|
$15,062
|
$15,062
|
$30,124
|
|
�
|
�
|
�
|
�
|
|
Total
Amount in Fund
|
$35,062
|
$35,062
|
$70,124
|
*� This
is the amount that can withdrawn at any time without
incurring taxes.
So, in this case, Gary &
Cassi can withdraw up to $40,000 at any time to use for
Diane's college...or for any other need...without
being taxed or penalized.� If Gary & Cassi
start dipping into the "$30,124" portion, then
they will be taxed at their "normal" tax rate
(probably 28% or 31%)...but they still won't have to pay
any penalties or excessive taxes.�� Also, as
we hinted above, these features apply for other goals,
such as your own college...and even for a down payment
(up to $10,000) for first time homeowners!
|