Covering College Costs

Denise Trowbridge

Saving for college doesn't have to be complicated. In Ohio, we're lucky to have one of the top-rated 529 college savings plans in the U.S., according to investment analysis firm Morningstar. A state-sponsored 529 should be your first go-to for college savings, but there is another type of account that may benefit some families: the Roth IRA.

An IRA is an Individual Retirement Account and with this, you contribute after-tax dollars today and pay no income tax on withdrawals in retirement. But here's the fine print: Contributions to a Roth IRA can be used without penalty to pay for college expenses.

Other Roth advantages include:

*Roth IRAs are not counted as an asset in financial aid calculations or on the FAFSA (Free Application for Federal Student Aid), so money saved in a Roth doesn't increase your expected family contribution (the amount Uncle Sam thinks you should pay for college). In short: Money in a Roth IRA will not reduce the financial aid available to your children. That isn't true for a 529. All of the money in a 529 is counted toward your expected family contribution, which means you could be dinged for diligently saving.

*You have access to more investment options than in a state-sponsored 529 plan. In a Roth, you can invest in any stock, bond or fund available on the market. A 529 has a set menu of options. Although, bear in mind Ohio's CollegeAdvantage 529 has many excellent, low-cost options, including Vanguard index funds.

*A Roth is more flexible. Suppose you aren't sure your child will go to college or your child is likely to receive a scholarship. You can stash $5,500 a year in a Roth ($6,500 if you're over 55). If you don't need that money for college, you can keep it for yourself, and it "can continue to grow until retirement," said Brad Huffman, certified financial planner with Future Finances in Worthington.

If your child lands a scholarship or doesn't go to college, it's more complicated to use 529 money for yourself. You'll pay income tax plus a 10 percent penalty to withdraw the money.

But there are Roth disadvantages:

*Only the contributions to a Roth, not the earnings on those investments, can be used penalty-free for college bills. If you save $5,000 a year in a Roth for 10 years, you can use $50,000 for college expenses penalty-free. If you withdraw any investment gains made on those contributions, you'll pay a 10 percent penalty. Remember, all 529 plan money - contributions and investment gains - are federal- and state-tax free when used for education expenses.

*Money taken out of a Roth IRA during the college years will be "considered part of (parents') income when filing for aid, so it might actually reduce the amount of aid available," Huffman said. That isn't necessarily a deal breaker. All the money in a 529 counts against financial aid, so it might be a wash between the two accounts. (A workaround could be to use Roth IRA money to pay for the last year of college; you won't be filing a FAFSA the following year.)

Savvy parents might consider saving in both a 529 and a Roth IRA. Tandem savings could work many ways. The first $2,000 per year per child you save in Ohio's CollegeAdvantage 529 plan qualifies for a state income-tax deduction. You could save $2,000 per year in the 529, then stash any extra college savings in your Roth. You'd have a tidy sum in your 529 and an extra cushion for the kids and/or your retirement in the Roth.

If feasible, don't rule out using a chunk of your paycheck to help cover college costs, too. It may be wise to have a few sources of money to draw from.

-Denise Trowbridge is a self-professed money geek who writes about personal finance, banking and insurance for The Columbus Dispatch, and