Financial Thread

[throwittoblythe]

More flexibility. Almost infinitely more investment choices. You can pretty much do whatever you want, whenever you want with that Roth IRA.

Say your kid is a musical genius and has a chance to take lessons from some world renowned piano player when they're 12 years old, you can dig in to the Roth if you need to to make that happen.

Just keep an eye on the fees and investment expense of the IRA.

An interesting thing I just found while doing a little web research on this... Apparently, if you use Roth contributions to pay for a kids college expenses, they're considered income for the student. This affects their financial aid funds. Of course, if you're not counting on financial aid for your student, then this wouldn't matter.

 

[DeftOne]

I do not know the specifics on a 529, but a Roth you can pull out your contributions (not earnings!) tax free. And they could then be spent as you wish - not necessarily strictly toward tuition.

https://www.nerdwallet.com/blog/investing/roth-iras-trump-529-plans-battle-education-funding/

a quick Google search brings up a variety of articles. This one says that qualifying education expenses can be paid for penalty-free through Roth IRA contributions. That provides some good flexibility when combined with the retirement purpose.

I've read Roth IRA withdrawals used for education expenses are counted as income for students on the following years' FAFSA, which affects financial aid eligibility. I assume withdrawals from a parent-owned Roth that are used for a child's education fall under this scenario? Anyone know for sure?

EDIT: Looks like throwittoblythe beat me to the punch and has read similar things... ;-)

 

[Gunnerclone]

The best tax deal would be the Iowa 529 since you can deduct the contributions on your Iowa tax return. Can't do that with the Roth.

Maybe.

 

[cowgirl836]

An interesting thing I just found while doing a little web research on this... Apparently, if you use Roth contributions to pay for a kids college expenses, they're considered income for the student. This affects their financial aid funds. Of course, if you're not counting on financial aid for your student, then this wouldn't matter.

I've read Roth IRA withdrawals used for education expenses are counted as income for students on the following years' FAFSA, which affects financial aid eligibility. I assume withdrawals from a parent-owned Roth that are used for a child's education fall under this scenario? Anyone know for sure?

EDIT: Looks like throwittoblythe beat me to the punch and has read similar things... ;-)

what happens with 529 funds? Is it not counted against the student?

 

[DeftOne]

what happens with 529 funds? Is it not counted against the student?

The withdrawals do not count as student income. They are counted as an asset though, which does affect student aid. However, it's at a much lower percentage.

It's the affect on student financial aid that has me questioning whether a Roth IRA is better than a 529, as the investment guy I mentioned initially told me.

 

[Gunnerclone]

I've read Roth IRA withdrawals used for education expenses are counted as income for students on the following years' FAFSA, which affects financial aid eligibility. I assume withdrawals from a parent-owned Roth that are used for a child's education fall under this scenario? Anyone know for sure?

EDIT: Looks like throwittoblythe beat me to the punch and has read similar things... ;-)

Just use the contributions for as long as you can, then it doesn't matter what you use them for.

 

[DeftOne]

Just use the contributions for as long as you can, then it doesn't matter what you use them for.

I'm not sure I understand what you're saying.

 

[Gunnerclone]

I'm not sure I understand what you're saying.

There is your cost basis, which can't be penalized prior to age 59 1/2 if withdrawn. And there are your earnings on the cost basis (which the goal is to have a lot of) that can be penalized if withdrawn prior to age 59 1/2.

 

[Stormin]

I have my account and my wife has her account. I pay her and she runs the household out of her account. We have no payments. My wife is a good money manager. I am also pretty reasonable and it works well. My wife has the freedom to take care of things she wants and I do too. I kind of have veto power. But rarely have to use it.

 

[DeftOne]

There is your cost basis, which can't be penalized prior to age 59 1/2 if withdrawn. And there are your earnings on the cost basis (which the goal is to have a lot of) that can be penalized if withdrawn prior to age 59 1/2.

I think we're talking about two different things here, though. You're talking about the parent getting penalized (taxed) for early withdrawals. I'm talking about the student getting penalized when determining financial aid eligibility (FAFSA student income) for using Roth IRA withdrawals for education purposes.

 

[Gunnerclone]

I think we're talking about two different things here, though. You're talking about the parent getting penalized (taxed) for early withdrawals. I'm talking about the student getting penalized when determining financial aid eligibility (FAFSA student income) for using Roth IRA withdrawals for education purposes.

If you don't specify that you are using the w/d from the Roth IRA for education purposes then it won't count against you.

This is what I'm talking about of the flexibility with the Roth. People over-complicate. Basic principles; money you have paid tax on already (like CONTRIBUTIONS to a Roth IRA) is yours to do what you like with. I'm of course assuming that since we're talking about paying for a kids college that the 5 year threshold from the first Roth contribution year would not apply.

 

[DeftOne]

If you don't specify that you are using the w/d from the Roth IRA for education purposes then it won't count against you.

This is what I'm talking about of the flexibility with the Roth. People over-complicate. Basic principles; money you have paid tax on already (like CONTRIBUTIONS to a Roth IRA) is yours to do what you like with. I'm of course assuming that since we're talking about paying for a kids college that the 5 year threshold from the first Roth contribution year would not apply.

I see what you're saying, but I think the IRS, US Department of Education, et al might take issue with that approach as it seems a little shady. ;-)

 

[Gunnerclone]

I see what you're saying, but I think the IRS, US Department of Education, et al might take issue with that approach as it seems a little shady. ;-)

They don't. They already got theirs on contributions made to a Roth IRA.

 

[cowgirl836]

If you don't specify that you are using the w/d from the Roth IRA for education purposes then it won't count against you.

This is what I'm talking about of the flexibility with the Roth. People over-complicate. Basic principles; money you have paid tax on already (like CONTRIBUTIONS to a Roth IRA) is yours to do what you like with. I'm of course assuming that since we're talking about paying for a kids college that the 5 year threshold from the first Roth contribution year would not apply.

so you are saying to take out contributions and then write a check to your kid. It's only when you get to non-contribution money that it would be an issue.

 

[DeftOne]

They don't. They already got theirs on contributions made to a Roth IRA.

OK, so the IRS may not care since they "got theirs already", but I'm sure the Federal Student Aid office and the US Department of Education would care. If they didn't care, they wouldn't have the rule (Roth withdrawals used for education expenses counting as student income). Again, I'm assuming withdrawals from a parent-owned Roth applied to a child's education fit that scenario.

 

[Gunnerclone]

so you are saying to take out contributions and then write a check to your kid. It's only when you get to non-contribution money that it would be an issue.

Exactly.

 

[Gunnerclone]

OK, so the IRS may not care since they "got theirs already", but I'm sure the Federal Student Aid office and the US Department of Education would care. If they didn't care, they wouldn't have the rule (Roth withdrawals used for education expenses counting as student income). Again, I'm assuming withdrawals from a parent-owned Roth applied to a child's education fit that scenario.

This is where you are confused, you're getting lost in the verbiage. The only thing using the Roth w/d for "Education expenses" does is exempt you from the 10% penalty on withdrawal of EARNINGS from the Roth IRA. By earmarking the funds they are giving you a break on the penalty. If you don't withdraw the EARNINGS there is no penalty no matter what you use the money on so why would they care? They couldn't penalize you on that money no matter what anyway, they aren't losing out.

More simply: There are "ROTH W/D's used for education expenses", and then there are "ROTH w/d's that you TELL them you are using for education purposes".

Two different things and there's no hiding anything here or anything shady about it.

 

[DeftOne]

This is where you are confused, you're getting lost in the verbiage. The only thing using the Roth w/d for "Education expenses" does is exempt you from the 10% penalty on withdrawal of EARNINGS from the Roth IRA. By earmarking the funds they are giving you a break on the penalty. If you don't withdraw the EARNINGS there is no penalty no matter what you use the money on so why would they care? They couldn't penalize you on that money no matter what anyway, they aren't losing out.

I think the Federal Student Aid office would care because in their opinion the student's eligibility for financial aid is not being properly reported according to their guidelines. The student would be eligible for more aid than they should be.

Again, I think we're talking about two different things here. You're focused on penalties that would or would not apply to the parent. I'm talking about penalties that apply to the child (student), with regard to their financial aid eligibility.

 

[Gunnerclone]

I think the Federal Student Aid office would care because in their opinion the student's eligibility for financial aid is not being properly reported according to their guidelines. The student would be eligible for more aid than they should be.

Again, I think we're talking about two different things here. You're focused on penalties that would or would not apply to the parent. I'm talking about penalties that apply to the child (student), with regard to their financial aid eligibility.

see cowgirl's post above. that is the bottom line. The 529 is a fine product btw not advocating against it in any way.

 

[Tailg8er]

I think the Federal Student Aid office would care because in their opinion the student's eligibility for financial aid is not being properly reported according to their guidelines. The student would be eligible for more aid than they should be.

Again, I think we're talking about two different things here. You're focused on penalties that would or would not apply to the parent. I'm talking about penalties that apply to the child (student), with regard to their financial aid eligibility.

So does a kid have to count a Christmas check from Uncle Jim as income on the FAFSA? No?

What if Uncle Jim got that money out of his Roth IRA? How would the kid know if Uncle Jim doesn't tell him?

I think the rule for the kid to count it as income is assuming the Roth money came from earnings, not contributions.