Check my math, please - IRA vs. 529

privateID
Fri, 16 Mar 2018 14:35:37 +0000

I want to expand on a point I made earlier. A couple posts claimed that 529 vs IRA is like Roth vs IRA. If you take out the money freshman year (actually first year and half of college), that is not true. I agree it is true as far as taxes are concerned. However, for financial aid it is not true. When you use a deductible IRA, that income gets added back in the year of the contribution. Then if you withdraw the money from the IRA freshman year, it would be income again. The same money would be counted twice as income for financial aid. This is why I think the OP’s calculations favor the 529 - he correctly understood this point. When you use a 529, ROTH IRA or don’t take the money out of a regular IRA till Jan 1 of sophomore year (because of the prior prior rules), that income is only counted once. Since income is the biggest factor for financial aid, I think this is an important point.

In fact, given only two years of growth for child #1, I think it would be better to leave the money in the bank than do a regular IRA and withdraw the money freshman year. You are talking about two years of tax-free growth (should be very little since that money should be invested conservatively for a goal two years out) vs counting the money as income in more than one year of college.