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Post-tax investments that grow tax-free, like 529 Plans and Coverdells.

Families with adjusted gross income (AGI) above $160,000 cannot participate in Roth IRAs.

Individuals with AGI greater than $110,000 do not qualify either.

2007 Contribution Limits are $4,000.

2008 Contribution Limits will go up to $5,000.


Roth IRA

While 529 plans may be the hottest and most flexible way to save for college, recent laws make saving for college via Roth IRAs a lot more favorable than in the past.  Roth IRA has advantages over 529 plans and Coverdells in that assets in Roth IRAs do not count for financial aid purposes, which generally increases grants and overall aid.

Roth IRA - flexible saving for retirement or education

If a family qualifies for a Roth IRA, it would be a wise investment for the reason that it is extremely flexible. With a $4,000 contribution limit, slated to increase to $5,000 in 2008, Roth IRA funds may be withdrawn free of early withdrawal penalties (and in some cases, earnings can also be tax-free) to pay qualified educational expenses. Otherwise, for retirement purposes, there are a ton of intricate laws which make the comparison of Roth IRA to other forms of retirement savings an ongoing debate.

IRA Contribution Limits

YEAR AGE 49 & BELOW AGE 50 & ABOVE
2002-2004 $3,000 $3,500
2005 $4,000 $4,500
2006-2007 $4,000 $5,000
2008 $5,000 $6,000

Traditional IRA
Like Roth IRAs, Traditional or Classic IRAs are able to be withdrawn early for educational expenses. While withdrawals are not tax-free, contributions into Traditional IRAs are tax deductible on both federal and state levels. The only other downside is a low income phase out range for those who have a 401(k) account at work ($32,000 - $42,000 for singles, $52,000 - $62,000 for joint filers).

Get more in-depth guidance on Roth IRAs by subscribing to ESP Wizard college planning software

 

Top 3 FAQs
  • How do Roth IRAs compare with other college funding options, for college and K-12? [takes user to Compare Options Chart]
  • How do Roth IRA withdrawals for educational expenses get treated for my income taxes?
  • Who are some of the quality Roth IRA providers?