06 Nov Should I use Roth IRA for college savings?

Q. I want to save money for my grandson’s college. I know you can take money from a Roth IRA for college. Instead of saving to a 529 plan, should I save in a Roth? And can I put the Roth in his name?
— Gramps

A. It’s great that you want to plan for your grandson.

First, to the idea of doing a Roth IRA for him, you may not be able to and you’ll probably need to involve his parents.

“You can only do a Roth if he has earned income. You just can’t set it up,” said Jerry Lynch, a certified financial planner with JFL Total Wealth Management in Boonton. “Depending on his age and if he works, that may not be a option.”

Lynch said if you can do it, a Roth might be a great option because the funds in a Roth won’t count against him for financial aid purposes.

IRAs have a provision that allows you to withdraw money for qualified higher education expenses without the 10 percent early distribution penalty.

Another option is to save the money in a 529 plan, and those funds — if the account is owned by a grandparent rather than the student or his parents — won’t factor into financial aid formulas, either.

“Money in the kids’ names counts 100 percent for college. Money in the parent’s name also counts. Money in the grandparent’s name does not,” Lynch said. “So it is a good thing to have Grandpa set up the account and everyone can fund that, especially if the family has limited means.”

Keep in mind that for the years the funds are used for college, they will be considered income to the student and would potentially impact financial aid.

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The post was originally published in November 2017.