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Want to build up a college fund? Read on to see why a regular brokerage account might be your best bet.
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The cost of college has risen dramatically over time. For the most recent academic year, the average cost of tuition and fees at an in-state, public four-year college was $10,423, according to U.S. News & World Report. And that’s pretty much the least expensive option for four-year college.
You may be inclined to do what you can to save well for your kids’ education. And to that end, you may be eager to either open a 529 plan or sock funds away in a Roth IRA. Both of these options offer the benefit of tax-free investment gains and withdrawals. But here’s why you may want to put your college savings into a regular, taxable brokerage account instead.
1. There are no yearly contribution limits to follow
If you opt to save for college in a Roth IRA, you’ll be subject to whatever annual contribution limits apply at the time. Right now, you’re limited to $6,500 a year if you’re under the age of 50. But if you don’t have such a long window of time to save for college, you might prefer to set aside more money than that per year to cover your kids’ education costs.
The great thing about a traditional brokerage account is that there are no annual contribution limits to adhere to. You can fund your account with $5,000 in a given year, $10,000, or more — the choice is yours and can hinge on what you can comfortably afford.
2. Your money is not restricted in any way
With a 529 plan, you’ll be penalized on the gains portion of your account if you withdraw funds for non-education purposes. And with a Roth IRA, similar penalties can apply for taking an early withdrawal for a non-qualified reason (you can tap an IRA ahead of retirement without incurring penalties for purposes like paying for higher education and buying a first home).
Now, in the case of a Roth IRA, you get more flexibility with your money than a 529 plan, because you could always opt to reserve funds not needed for college for retirement (though starting next year, 529s will allow for a limited lifetime rollover to a Roth IRA for funds not needed for education). But with a traditional brokerage account, your money is not restricted at all.
You can withdraw funds from a traditional brokerage account to pay for furniture, a car, or anything you want. There are no tax benefits to be had with one of these accounts, so you’re able to do what you want with your money. This means there are no penalties to worry about, period.
It’s easy to see why you may be eager to enjoy some tax savings in the course of putting money away for college. But if you like the idea of getting to contribute as much as you want for college savings on an annual basis, as well as the idea of being able to use your money as you please, then a regular brokerage account could end up being a better option for you. This especially holds true if you want your kids to go to college but acknowledge that there’s a chance they may wind up opting out.
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