A Roth or a 529 for a grandkid

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Q. My father wants to start a Roth IRA for my son, but I think a 529 Plan is a better investment. What do you think?
— Choices

A. The right decision depends on your father’s intentions.

If it is to help your son get a jump start on retirement savings, then a Roth IRA could be a great option, said Bryan Smalley, a certified financial planner with RegentAtlantic in Morristown. If it is to help save for your son’s college education, then the 529 account is the way to go.

Smalley said if we’re talking about retirement, a Roth IRA should be a strong consideration.

“Money in a Roth IRA grows tax free and if certain parameters are met, distributions from a Roth IRA can be tax free as well,” Smalley said.

He said it’s important that your father know that a Roth IRA can be opened for your son, but contributions can only be made to the extent your son has earned income — up to $5,500 before contributions are capped. If your son does not have earned income, then this is a non-starter and your father may need to re-evaluate whether he still wants to help with retirement savings or if he wants to help with saving for college, Smalley said.

If college is the goal, a 529 account is the recommended savings vehicle, Smalley said.

“It allows for all contributions to the account to grow tax free and for all distributions from the account to be tax free as long as they are used for qualified higher education expenses,” Smalley said. “Other benefits of a 529 account for your father include: your son does not have to have any earned income for your father to make a contribution to the account and as the owner of the 529 account, your father, has the right to change the account beneficiaries if your son decides not to go to college.”

Either way, it’s great that your father wants to help you son, who will have a leg up financially whichever way your dad decides.

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This story was first posted in February 2016.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.