Hi all,

I've been trying to research this issue and just get a headache and more confused, the more I read about it......My twin boys just turned 1 and I have some savings in an ING account for them, but looking into transferring that to either a Roth IRA or my state's (north carolina) 529 plan. I can't figure out which would be the best bet. From what little I understand, with the 529 plan, I can have a state tax deduction, but the money MUST be used for education (either for my boys or it can be transferred to another relative)...with Roth, I can withdraw the money for college (only what I contributed, not the gain) at no penalty, but I get taxed on it now.....Am I correct? Is there anything else I should know? Any recommendations would be GREATLY appreciated!!

Michele

Michele,

You might be able to borrow to finance their education but no one will loan you money to finance your retirement.

Michael

I think you're on the right track for understanding, but just to clarify - there is no federal deduction for either savings vehicle. Yes, you can get a state tax deduction for a 529 plan under the right circumstances, but that's a relatively small benefit and I don't know that I would plan around it.

Yes, you could use a Roth IRA and then withdraw the contributions at a later date without penalty; then you could keep the earnings for yourself and take them out after 59 1/2 without tax or penalty. But if you're starting early, and you are, the earnings will become a significant part of the account and you might wish later that you had easier access to them.

I'd lean towards the 529 if you're content to put this money aside and decide that it and the earnings are to be used for college. But there are so many things we don't know that it's impossible to say one is better than the other.

For long term planning, I'd lean toward the Roth. We all hope there are huge earnings on our Roth's and 529's, but that's not guaranteed. The Dow Jones Industrial Average was 7965 on the first day Roth's were first available, and at the moment (12 years later) it's at 10756. Where will it be in 17 years?

What's going to matter is how much you contribute. These days, earnings are uncertain. My choice of a Roth is only because it gives you more options in the distant (hard to predict) future.

I am not a financial planner or expert in much of anything. I'm just expressing my opinion in answer to your question, for what it's worth.

I'll also add a comment with the important caveat that this is not my area of expertise. From my understanding, a person is not required to use the 529 plan of the their state of residence. I believe you can choose whatever state's plan looks most attractive to you.

I suggest you do an internet search of the best state 529 plans so you can properly educate yourself. Don't feel you're locked into North Carolina's plan. When I did the search, Kiplinger's has some specific recommendation for North Carolina:

http://www.kiplinger.com/features/archives...-529-plans.html

Again, I believe you have flexibility on which state's plan you use. There is a lot of info on the internet on this topic.

Good luck!

I believe that is correct, but would add that, at least in Kansas, you only get a tax deduction if you use their plan. I'm not positive if that is true in all states, but it is something to ask before investing in another state's plan.

Best site for 529's:

http://www.savingforcollege.com/

I am a financial planner and yes you can choose a state sponsored plan outside of your state of domicile. However, NC requires you use their plan to get the deduction. "Contributions to the North Carolina 529 plan, including rollover contributions, of up to $2,500 per year for an individual taxpayer, and $5,000 per year for married taxpayers filing a joint return, are deductible in computing North Carolina taxable income. Beginning in 2012, income limitations are imposed."

I think it is a tough call since I don't know your entire financial picture.

529's are really best used once you have maxed out your retirement savings. They are also good for wealthy relatives to contribute since the gift tax limits are higher.

As a poster said, there is no such thing as loans, grants, scholarships, etc. for your retirement.

I would do the Roth with the money and set up a monthly 529 contribution with new money for the kids. You can do as little as $50 a month. Remember, for the Roth you have to have earned income and be under a certain income to even qualify for a contribution. (2010 has lifted income constraints for conversions...not contributions)

A word of caution about 529 plans. You need to look behind the curtains and determine who is managing the plan, how the funds are invested, and the "house take" - the expenses and fees. You are locking into a system where you have little control. Ask lots of questions. In my experience, making investment decisions based upon up front tax savings is often a bad idea. Over a long period of time, performance dwarfs tax savings.

You may want to google "criticism of 529 plans" and look for potential negatives.

Much like the "Retire 2040" type financial instruments, the 529 plans have a gimic component ~ AKA a "marketing" component. Financial institutions love to create new mechanisms for making a buck. There is nothing wrong with that, but look past the glitter.

Consider today's headlines. GS created CBO instruments, using a hedge fund exec to select paper for the portfolio. After the package was sold to investors, the hedge fund exec SHORTED the package. In laymens language: Guy 1 put junk into a basket, GS sold it to others (without accurate disclosure), and Guy 1 than bet heavily that the basket was worth less than the price GS set. Does anyone see a conflict of interest here?

Be skeptical about new financial packages. Bogel did a great job at Vanguard to invent low cost index funds. He decided he could make money over the long haul by offering a more efficient investment. Sadly, there are too many folks who are primarily focused on their short term greed.

I disagree with the sentiment, although there is some truth here. There are some 529 plans that operate as "black boxes" where there is no track history for the fund because it is newly created for just this purpose, and you might indeed have little control - I would stay away from them. But there are others where the 529 is just a "wrapper" option for funds that are otherwise sold in regular taxable accounts, and you can make changes (possibly limited to once per year, but that's really not a big problem, IMO) and to call these "gimmicks" or "new financial packages" is simply inaccurate. It's no different than having the option to buy fund X in an IRA vs. in a regular taxable account.