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Retirement Questions: College Savings

Question: My husband and I are 57. Our grandchildren are 4 and 2. We'd like to set aside savings for their future college expenses. Can you help us compare 529 plans and Roth IRAs?

Answer: If you're set with retirement savings — congratulations! Your children and grandchildren no doubt appreciate your generosity. However, if you're trying to save for retirement and your grandchildren at the same time, you may want to make retirement your number one financial objective.

When you're ready to establish the college savings accounts, here are some things to keep in mind.

529 Savings Plan Roth IRA
  • Your investment has the potential to grow tax-deferred
  • Qualified distributions are exempt from federal income tax
  • Contributions, earnings and withdrawals may be exempt from state taxes
  • Investment of the account may be handled by the plan in an age-based or static portfolio; investment options may be limited
  • Generally no income or age restrictions for the donors or beneficiaries
  • Can be used for any accredited higher education institution in the U.S.; can be transferred to another beneficiary
  • Withdrawals must be used for qualified education expenses, unless certain conditions are met
  • Earnings subject to federal income tax and 10% IRS penalty for nonqualified withdrawals, unless certain conditions are met
  • Beneficiary and investment direction may be changed only once per year
  • State determines lifetime contribution limit (for example, $250,000 per beneficiary); federal gift taxes may apply
  • Your investment has the potential to grow tax-deferred
  • Qualified distributions are exempt from federal income tax
  • You can typically choose from a wide variety of investment options
  • Eligibility is phased out at certain income levels
  • You can keep contributing after retirement (beyond age 70-1/2)
  • Withdrawals of contributions are tax-free at any time
  • Withdrawals of earnings are tax-free if they are taken five years after the first contribution and one of the following conditions applies: you are age 59-1/2 or older, you die or become disabled, you withdrawal funds (up to $10,000) for the purchase of a first home
  • Earnings subject to federal income tax and 10% IRS penalty for nonqualified withdrawals, unless certain conditions are met; 10% penalty doesn't apply if withdrawal taken for qualified education expenses
  • Withdrawals aren't subject to age 70-1/2 required minimum distributions
  • Internal Revenue Service determines annual contribution limit; 2014 limit for individuals age 50 and older is $6,500 to all IRAs

 

You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.

Insurance products and plan administrative services are provided by Principal Life Insurance Co. Securities are offered through Princor Financial Services Corp., 1-800-547-7754, Member SIPC and/or independent broker dealers. Securities sold by a Princor® Registered Representative are offered through Princor. Princor and Principal Life are members of the Principal Financial Group® (The Principal®), Des Moines, IA 50392.

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