| Sargent & Lundy Savings Investment Plan |
| WHICH IRA FOR COLLEGE? |
| The following excerpts are from an article in the April
1998 issue of "Money" magazine. The opinions of the author, Karen
Cheney, may or may not reflect those of the SIP Committee.
Here's a quiz: In which newly created Individual Retirement Account should you stash your child's college money, the Education IRA or the Roth IRA? It sounds like a no-brainer. "The typical investor would go with the Education IRA," says Bala Cynwyd, Pa. financial planner Stephen Cohn. "After all, it's called an Education IRA." Surprise. For a lot of college investors, that's the wrong answer. Truth is, if you don't need the money within the next five years, you may be better off stashing those college dollars in a Roth. But wait a minute, didn't Congress create the Roth last year as a place for your retirement stash? Of course. But if - like many investors - you already save the max in a 401(k), SEP-IRA, or Keogh, this alternate use has advantages. To qualify for either IRA, couples filing jointly must earn no more than $150,000 to $160,000 and singles no more than $95,000 to $110,000. The Education IRA lets you put aside up to $500 a year. This means that if you start saving when your child is still in Pampers, you'll have $22,800 in 18 years, assuming your investments return 10% a year. That's about enough to pay for one semester at a private college in 2016. By contrast, you can shovel $2,000 a year into a Roth ($4,000 if you're married and file jointly), allowing you to pile up $91,198 over those 18 years. Another advantage if flexibility. The new Education IRA has more strings attached than a marionette. For instance, if you cash in your Education IRA in the same year you take the new Hope credit or lifetime learning credit - two new tax credits aimed at easing the burden of college financing - you'll have to pay taxes on the distributions from the IRA or the credits will be disallowed. You're also forbidden from contributing to both an Education IRA and a prepaid tuition plan in the same year. Finally, you child must spend the money on education expenses by age 30. If not, he can transfer the assets to a younger sibling or another qualified family member - or cash out the account and pay income taxes and a 10% penalty tax on the balance. Compare that with a Roth. Once you start drawing down a Roth - which you are free to do after five years - you pay taxes on your earnings but not your original contributions. And if you're 59-1/2, your full distribution si tax-free. And there's no mandatory age at which you're required to tap the money, so even if Junior wins a full-ride scholarship or joins the circus, you can keep the money in the account until you're ready to cash it in or pass it on to your heirs. That brings us to the final reason: The Roth is in your name, not your child's. Let's face it, retaining control has a definite appeal. Even better, since this money is in your name, most schools won't figure it into their financial aid formulas. Technically, it's retirement money. Some colleges do scrutinize your retirement savings, so this upside is not guaranteed. But even those schools generally expect parents to fork over no more than 5.6% of their assets a year, compared with 35% of a child's. Of course, if you've got cash to spare, you can go for both the Education IRA and a Roth. Or better yet, let the grandparents start an Education IRA, while you funnel money into a Roth. It doesn't take a college degree to know that the more you can shelter from Uncle Sam, the better. |
This page updated on 3/19/98