those under 50 years old is $ 5,500 , and those 55 and older $ 6,500 . Your spouse can also contribute the same amount to the Roth IRA account based on his or her age . Those contribution amounts go up over time in $ 500 increments based on inflation .
Let ’ s say you and your spouse contribute the maximum amount ($ 5,500 each ) into a Roth IRA for 18 years starting when your child is born . The contribution amount allowed will go up with inflation , but let ’ s assume there is zero inflation for this example . At the end of those 18 years , you and your spouse would have saved $ 198,000 in the Roth IRA , not counting earnings on those savings . If the account earned an average of 6 % per year , then the account would be worth $ 360,360 . Not bad .
Since you can withdraw the principal with no penalty or taxes assessed , you have easy access to $ 198,000 . The balance ($ 162,360 ) can be used for retirement or , if you needed , used to pay for qualified education expenses . In that instance taxes would be owed on any earnings withdrawn before you reach the age of 59 ½ , but there would be no penalty . However , it is usually recommend to withdraw the non-taxable principal only and not the taxable earnings whenever possible .
Since these assets are in a retirement account , here ’ s another benefit : they are not included in the calculation for determining student financial aid until after they are withdrawn from the account . If your child qualifies for student aid , you can hold off taking a distribution , which can make financial aid calculations more favorable for your family . If waiting to take a Roth IRA distribution is determined to be optimal , you can then use other assets to pay for school such as current employment income , other savings accounts , or even low interest loans .
Let ’ s consider a best possible scenario . Your child is accepted to the University of Michigan , your debts are all paid , and your income is high enough to pay for educational costs out of pocket . The Roth IRA wouldn ’ t be needed at all , and you would have an extra $ 360,360 that can continue to grow tax free and be earmarked for retirement !
Now let ’ s think about a worst-case scenario . Your child gets into Michigan
State University ( kidding !) and you lose your job at about the same time and without enough savings to cover living expenses while unemployed . Now what ? Since your income is presumably low , your child should qualify for some aid in the form of grants and / or loans . Your Roth IRA would also be there to save the day , since you can take distributions from the principal with no penalty or taxes . This can be an effective back-up plan in addition to your emergency savings . If you are worried about the distributions counting against college financial aid options , you may be able to write an appeal to the college ’ s financial aid department . By explaining your situation it is possible to obtain favorable financial aid results based on your hardship .
The Roth IRA offers much flexibility and should be considered as a college savings tool , especially when financial resources are limited . Talk with your financial professional to see if a Roth IRA makes sense for you .
Portfolio Solutions ® does not provide tax advice . This material has been prepared for informational purposes only , and is not intended to provide , and should not be relied on for , tax advice . You should consult your own tax advisor before engaging in any transaction .
At Portfolio Solutions ®, we provide a full spectrum of wealth management and financial advisory services so that our clients can work confidently toward their long-term financial goals . Our low-cost , index investment strategies allow our clients to keep more of what the global markets offer , letting them focus on what matters most to them .
DALLAS COUNTY Living Well Magazine | JANUARY / FEBRUARY 2017
29