Check my math, please - IRA vs. 529

BelknapPoint
Mon, 26 Mar 2018 15:25:05 +0000

As described in my original post, with a traditional IRA you save taxes up front, but then pay them later (which is a wash); but since the distribution is considered income, it reduces FAFSA aid by 47%. With a Roth, you don’t avoid taxes up front, but you don’t pay them later (also a wash); but my reading of the FAFSA instructions is that distributions from a Roth IRA are also considered “untaxed income” and therefore reduce need-based aid eligibility by 47%.

It’s only a wash if you’re in the exact same tax situation when you contribute the money to the IRA as you are years later when you retire and take the money out… same tax laws and regulations, same income, etc. There’s no way that’s going to be the case. When you contribute to a traditional IRA, you’re betting that your tax situation will be more advantageous to you in retirement than it is during your earning years. When you contribute to a Roth IRA, you’re betting that your tax situation will be more advantageous to you in your earning years than it is during your retirement.