Welcome to the Great Retirement Debate. We have a good episode today. What are we talking about, Jeff? Today, we're gonna ask the question. Should I use a Roth IRA to save for college education? That's pretty good. A lot of tax free money there. A lot of tax free money. So before we get into the should, let's talk about potentially some of the options.What people are doing now? Yeah. So there there are a lot of different ways. I think the most common way that people who are intentionally saving for college today would do so is with a five twenty nine plan account. So five twenty nine plans for those who aren't aware are special vehicles primarily for higher education purposes. It used to be exclusively, and then some recent changes now allow a limited amount of those dollars to be used for a k through twelve education each year. Also a limited amount to be used over the course of a lifetime to pay down existing student debt. But primarily, those accounts are still used for the future expenses of higher education. So college, graduate school, etc. The money that goes into the account at the federal level is not deduct though many states do offer a tax deduction at the state level. It grows tax deferred, kinda like an IRA or Roth IRA while it's in there. And then later on when distributions occur if those distributions are used for qualified education expenses. So, tuition, room and board if someone is at least half time, could be even be for computers or even internet costs today, then those dollars are tax free, kind of like a Roth IRA. So there's a lot of benefits to the five twenty nine plan, but while it is the probably the most popular way to save, it's not the only way. Some people still save in taxable accounts, even under a child's name, like an, or an utma type of an account. Also another way to do so would even be through roth IRAs. Alright. There's one thing you wrote an article on this. I'd say about a year or two ago about the problem with, well, or opportunity. There was a word you used. I forget you used the word you used to describe the super five twenty nine. Oh, the dynasty five twenty nine. Right. Right. Right. Right. So what's the opportunity slash problem? Yeah. So I mean, the biggest thing with five twenty nine plan is that you have the ability to change the recipient of those dollars over time. So let let's say that, you have three kids and one ends up not going to college, or god forbid, that gets a scholarship. I know, the horror. I know. Then, you go there a dropout like Bill Gates. There you go. Hey, guys. What a what a terrible mistake that was. Do I well, you take those dollars and you can actually just shift them to another individual. And that's different than most other tax deferred account. Right? Like, you can't take an HSA that belongs to you, and then Healthy. Magically make it someone else's. You can't do the same with an IRA. Right? The I in IRA is individuals. It's yours. It's yours for life. Right. The only way to get it from you to someone else is to die. Which is not good planning. So And I remember the media picked up on your term then. They said, wow, this is great, but is it great? You know, it depends on what you want. The dynasty five twenty nine plan can expand. And, it, it, you know, will those dollars actually be used for that purpose? You know, ultimately, it's very hard to force someone in the future to use those dollars for education. But if we're talking about, let's say, for your child or for your grandchild and you're still living, you have some control over that, then you can dictate. You can still be the owner of a five twenty nine plan. And as long as you're here, you can decide how those funds can used. I've even seen some seniors going back to school to use up all the excess dollars. Yeah. Lots of different ways you can do that there. You can use it for vocational school. So some people get back and wanna be a chef, you know, wanna learn more about cooking. Lots of different uses for the five twenty nine plan, but let's let's start to break down. So the ultimate question for today is should you use a Roth IRA for funding of education expenses? And look, the answer to to ninety nine percent of the debates that we have here at is it depends. Right. Right. Like, that's almost the answer to every question we always ask. But The reality is here, if there's an opportunity to use a Roth IRA and have dollars come out tax free, for education, there's not a whole lot of downside I know. To using a Roth to do so. Even though it's not the most popular vehicle, It actually has several advantages over a five twenty nine plan. So, you know, one of the biggest advantages is that a five twenty nine plan is considered at least if it's owned by a parent or the student, it's considered an asset on the Fafsa form. That's the free application for student aid or for federal student aid. And, That, you know, that can limit if you have enough money. If you do a good enough job, saving for your child's education inside a five And you'll need that money. That's right. You'll you'll be sure that you're gonna need that money because it reduces the opportunity, for for the school or for the federal government come in and subsidize that cost. By contrast, money inside a Roth IRA or really any retirement account is actually excluded as an asset. On the fafsa form. It doesn't you can have a a a million dollars, two million, a billion dollars in a Roth IRA. There's no impact on college aid eligibility. With the Roth. Now the big thing that people point out is, yes, but with a five twenty nine plan, everything is tax free if you use it for qualified education. But in many cases, the Roth IRA dollars can also be taxed. Right? Right. Right. Right. You could get it all out. And that's the reason. I mean, the idea of a time for five twenty nines was great, but what happened is the people that used most, like in your dynasty example, got too much money in there. Mhmm. Even Congress has recognized this. It's secured two point o. Maybe congressmen had these issues. And they created this new provision effective now in twenty twenty four where you could roll five twenty nine plans over to Roth IRA, but it's not all it's cracked up to be. There are severe limitations. The account has to be open, fifteen years. The first The last five years don't count. It has to be under the name of the beneficiary, but the big limit is the overall limit of a lifetime, thirty five thousand. And that's one of the few numbers in the higher bill that wasn't adjusted for inflation going forward. And so even that some people, oh, you have a small account. That's not bad. But you can't even do the thirty five thousand all in one year. It's limited to the IRA contribution amount, a Roth IRA contribution amount, which right now, the most might be seven thousand. So take you five years to use that. So, but even Congress realized there was too much money building up in these accounts. This didn't do much. It recognized the problem but didn't do much to fix it because So let's let's talk about, you know, in a Roth IRA. If if the big question is right, hey. If I put this money in a five twenty nine plan, then I can take it out and use it regardless of the of the time tax and penalty free as well, like, there's no one year. There's no waiting till fifty nine and a half. It's just whatever the account is as however long it's been there. As long as it's used for education, it's tax and penalty free. And that's often the the thing that people point to when they say, well, that's why I'm using a five twenty nine plan. But there's a lot of money that can come out of roth tax and penalties. That's right. That's right. Alright. So let's talk about that. What are Yeah. First of all, the Roth has none of the limitations we all talked about with the five twenty nine. Nothing. You could take the money out and bet it on a horse if you want. That's right. Generally tax free. If you generally have the five years fifty nine and a half. And for most people that are used setting these up for kids in college, a lot of them are past fifty nine and But even if they're not, Roth IRAs have a very favorable distribution rules, what we call ordering rules. The contributions, the original contributions you would might have made, annually. So this year, like, the seven thousand dollars you can put Yeah. That will always always come out tax and penalty free. What if I need it a year later? It doesn't it doesn't met it. What if I needit five years later? Yeah. At any time. What if it's for any reason? So I can go play video games. Any reason, any video game that's the contributions. And the same thing can mostly be said about the conversion layer. That might be the bigger dollars. That will always come out tax free because that those those funds were taxed when they were converted. Not maybe all penalty free depending on when you're distributing it. So that really just leaves the earnings layer. And the reason I gave these tiers is because that's the order it comes out in. The first dollars out are deemed to come from the best position, the contributions, then conversions, and then earnings. So it's a great account to use, for education, but for anything. Alright. So the the let's say for the next ten years, I put in seven thousand dollars a year. That's seven thousand Into Roth. Right? Into the Roth IRA. That's and and just to be clear here, a lot of times when we say the Roth, we're being equivalent about Roth IRAs and Roth four zero one ks, but here specifically talking about Roth IRAs. There are some key differences. So let's say for the next ten years, I make my seven thousand dollar Roth IRA contributions per year, that's seven thousand times ten years is seventy thousand dollars. You're telling me in ten years, no matter how old I am, no matter what purpose I use it for. So Any time for any reason I could take seventy thousand dollars out. Tax and penalty for you, of course, I could use for my kid's education or anything else. Right. Okay. So that's pretty good. But Let's say I wanna send my kid to NYU, which I hear is a very expensive school. I know. So let's say I wanna do that, and that's gonna cost me, I don't know, what is it? A hundred thousand dollars a year at? I don't know. I'm out of touch. I don't remember. It was a It was a lot. It was enough. Yeah. Let's just make it. I know it's not that high, but let's just make it a hundred thousand dollars a year. I remember, I was paying at the master's level. So at a hundred thousand dollars, you're hypothetically again. Right? I I've only got ten years worth of Roth IRA contributions. Now you said, and you made a good point If you have five years and fifty nine and a half, then everything in your Roth IRA is always tax and penalty free. It's the golden rule. Right. Every you can't It one of the few things that we could say, you can't mess it up, even if you try really hard. Even if you want, even if somebody's but I wanna pay a tax. You can't. You can't. It's just not happening. Right? Five years and fifty nine and a half you can use it for anything. But not every parent is gonna be fifty nine and a half. Right? Not everybody's but so conversions we can effectively get there. Right? Right. Because a conversion while it's not as flexible as the contribution A conversion can come out at any time, tax and penalty free as long as you converted more than five years ago. Right. So so Ed, I'm I'm forty years old this year. Let's say I wanted to, prepare for my kids going to NYU, and I converted three hundred thousand dollars from my IRA to my Roth IRA today. And I my oldest will be going to college in about, ten years or so. Right? Nine years. So nine years from now, I could take that three hundred thousand dollars out. And I'll only be forty nine. Well, first, the contributions. Uh-huh. And then the conversions, all tax and penalty free. So, really, if we plan ahead, The idea that there could be a penalty really can be eliminated with okay. Unless you, you know, dipped into the earnings before fifty nine and a half. And that might be the big difference then between, let's say, a five twenty nine plan and a Roth. Right? Right. With the five twenty nine plan, you know, if you think about should you, well, this would be one of the counter arguments. Right? If you if you have a lot of earnings that accrue over time. And let's say you start saving when the child is young, it could be substantial amount of earnings. Those earnings inside a five twenty nine plan will be ten penalty free and tax free if used for education. Right. But with the Roth, you might have some trouble. The Roth may be great, but in a situation where you have excess five twenty nine money, if there's a bill, I would try and use that money up first. That's a good point. Alright. So let's let's look at it a little differently. So far, we've talked about kind of the proactive pre planning, which is awesome. And hopefully, lot of our listeners are are in that stage of life, but let's say someone today is listening in and they have five, they they have Roth IRA money, right, or or they're close in years to when they're gonna need this, but they won't be fifty nine and a half. What what can they do to, you know, to to potentially utilize the Roth IRA, but without impacting student aid? Well, they they can take that money out tax free. I mean, it doesn't. As you just said before, the Roth IRA bypasses that. Yeah. And and and and I think it's worth noting here. You know, one one important nuance, Ed, that I I think a lot of people are not aware of, right, is that when it comes to the income on, like, we talked about the asset of the Roth IRA on a fafsa form, but there's two elements the faster form. Right? There's an asset section and an income section. While the Roth IRA is not taxable, And it might be penalty free, right, if we're it might be tax and penalty free. Even though it doesn't count for income for regular tax purposes, it actually will count as income on the fafsa form. Now fafsa looks back two years. So, basically, by the time the kid is a junior in college, you can usually take income out of the roth without it. But if you're using a Roth IRA to pay for school, during those first two years, the freshman and sophomore year may pay actually to avoid it Now, obviously, not everybody has a ton of other money. So a great idea for a lot of people might be taking loans out. You have to say for a few years. Anything but using that Exactly. Anything but using that money. And then you can always use the Roth IRA to help repay the loans. And I I think there's actually several advantage of that. The first is that it gives you more time to build up money in the roth. Right? It's it's a few more years of earnings. Right. Another is if you're close to fifty nine and a half, it's two more years. You can Like, if you're fifty seven and a half when your child goes to school, two years in, you're fifty nine and a half now. Everything, even the earnings are tax and penalty free. And it does one more thing, Ed. One more thing, if you take if you have your kid take out loans in their name, and you have the Roth IRA to maybe help them pay that back. What do you think it does? I don't know. I'm way I'm waiting with baited breath. Gives you a little bit of leverage. Oh, okay. I don't know where you'll go. I was thinking tax law. You're talking about pair That's right. Parenting. I'm in that mode right now. It gives you a little bit of leverage. Like, listen, I will be happy to pay off these student loans for you if you maintain a be average, or if you, whatever certain conditions you as a parent wanna say, see average, b average. I see how that works. Yeah. Listen. I'm not. I'll have a reset point. Maybe I'll change my mind once I have my kids in college. But the point is is that you can always use those raw dollars later on. And You know, one more thing that does is it also if you take out loans in the student's name at least initially for those first few years, helps build credit. Oh, yeah. And there are very few things today that are more important warned than having good credit. A good credit score can actually save your child or grandchild more money over the course of their lifetime than maybe most other things that you could do. With a home mortgage. Mhmm. Alright. So, Ed, as we we sit here and we we think back to our discussion today and wrapping up what are your thoughts? Would you, you know, should you use a Roth IRA as a college savings vehicle? Yes. It's a great vehicle. But as I said earlier, if you have the five twenty nine that's much in there, that may be the way to go. Yep. Yeah. I I think I think that's a great way. Like, if you're if you're young and you know you're gonna be look, I'd say this. And also that you're it tax and penalty free situation in the Roth. I I think I think that's a hundred percent. If you've already got the money inside the the five twenty nine plan, it probably pays to use those dollars first in many instances because the Roth is more flexible. Right. Right. Once you're fifty nine and a half, you've got your five years, you can use it for anything. But for those who are just starting out now, you know, it it the, for the first time ever recently at the average age of birth for a woman, the average age at which she gave birth in America was north of thirty years old. Wow. And that's that's the first time we've seen that. So more and more parents are actually going to be fifty nine and a half either when their kids are going to school or shortly thereafter, So more and more parents are gonna have the ability to use, not just some, but all of their Roth dollars, tax and penalty free to avoid having it counted as an asset. So to me, I think it's a very underused account. I don't think it should always be used, but more people than not, or or I'd say a lot more people than do so today should give strong consideration to the Rothify. Right? Well, we started with why don't people use the Roth? I don't think they even consider it. Yeah. Then that's a shame. So let us know. What do you think? Do you think the Roth IRA is a good account to use for savings for college? Let us know. You can reach out to Ed on Twitter @TheSlottReport or myself @CPAPlanner. We'd love to hear from you and Ed as always. Thanks for a great discussion here, Ron, the great retirement to date.