Expecting Our First Child: Open 529 Plan or Max Out Roth IRAs?
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Expecting Our First Child: Open 529 Plan or Max Out Roth IRAs?
As expectant parents, there are so many things to consider and plan for before the arrival of our first child. One important financial decision that we need to make is whether to open a 529 college savings plan or to max out our Roth IRAs. Both options have their own advantages and it can be a difficult decision to make.
A 529 college savings plan is a tax-advantaged savings plan designed to encourage saving for future higher education expenses. Contributions to a 529 plan are made with after-tax dollars, but earnings grow tax-free and withdrawals are also tax-free as long as the funds are used for qualified education expenses. This makes the 529 plan a popular choice for parents who want to earmark funds specifically for their child’s college education.
On the other hand, a Roth IRA is an individual retirement account that allows individuals to save for retirement with after-tax dollars. The funds in a Roth IRA grow tax-free and can be withdrawn tax-free in retirement. While a Roth IRA is not specifically designed for college savings, it does offer more flexibility in terms of potential uses for the funds, as they can be used for retirement savings or even for other financial goals such as buying a home.
So, which option is the best for expectant parents? The answer depends on your financial situation and your priorities. If you are confident in your retirement savings and have extra funds to dedicate to college savings, then opening a 529 plan can be a great way to start saving early for your child’s education. The tax advantages of the 529 plan can help your savings grow more quickly and can provide peace of mind knowing that you are specifically investing in your child’s future education.
On the other hand, if you are concerned about your own retirement savings and want to prioritize that before saving for your child’s college education, then maxing out your Roth IRAs might be the better option for you. The flexibility of a Roth IRA can also be appealing, as the funds can be used for any purpose without penalty (although withdrawing earnings before retirement age may incur taxes and penalties).
Ultimately, both options have their own pros and cons and it’s important to consider your own financial goals and priorities before making a decision. Some parents may decide to do a combination of both – maxing out their Roth IRAs for retirement savings and then contributing to a 529 plan for their child’s college education. This can be a great way to balance both priorities and ensure that you are preparing for your own future as well as your child’s.
As expectant parents, it’s important to start thinking about these financial decisions early on so that you can start saving and investing for your family’s future. Whether you choose a 529 plan, a Roth IRA, or a combination of both, the most important thing is to start saving and investing as soon as possible to give your child the best opportunities for the future.
Don't delay opening the 529 just because you can't significantly fund it. The 15 year countdown for 529 conversations to Roth starts when the account is opened.
That's amazing they are able to do this with a newborn. When we had our first child (twins actually), the increased costs and decreased income were a huge shock to our finances. Had to reduce retirement savings to just the company match (5% for 7%) for a few years. We asked family to donate to 529's instead of giving gifts so we were able to get those started early.
Thankfully we are now able to max out 2 ROTH 401ks and contribute to the 529's each year. Our family still often donates to the 529s instead of giving large gifts. Occasionally they will buy a large gift (like a swing set one year) and skip the 529 contributions. But we are generally putting in about $5000 per kid per year.
Max out Roth IRA's AND contribute to 529.
The change to the withdrawal rules makes the 529 a better tool than it used to be.