Nicholas Scheibner, CFP®, is quoted on this topic, answering a reader’s question on NJMoneyHelp.com by Karin Price Mueller, “College bills are due soon. Which money should we use first?”, originally published on July 5, 2022.
A 60-second read by Nicholas Scheibner, CFP®: As with most financial questions, the answers will depend on your individual situation, but you can think of the three accounts as “Flexibility,” “Pre-Paid College Expenses,” and “Retirement” accounts.
Flexibility: The UTMA account provides the most amount of flexibility for spending. However, if you sell any investments in that account with a profit, you may have a capital gains tax. Also, UTMA accounts will potentially reduce the financial-aid package more than a 529 plan would. The UTMA account could be used to purchase a vehicle for your son if he may need one for school. If your son is not receiving any financial aid, then he could decide to save that money for future expenses, such as a down payment on a home.
Pre-Paid College Expenses: The 529 plan should be used for all qualifying education expenses. Think of it as college expenses you have already prepaid. Use them for tuition, books, room and board, computers, etc. Your goal with the 529 plan is to have a zero balance if your child still has education expenses. You do not want to have a large balance at the end of his education, with no plans for the future of the funds. Any pro-rated withdrawals not used for college will incur a 10% penalty.
Retirement: The last account to touch would be your Roth IRA account. You may need those funds yourself for retirement, and the Roth IRA provides tax-free flexible spending in retirement for you. Also, the tax-free growth potential of the account is significant.
If you have any further questions, please reach out to your Baron Team.
Disclosure: This is a general communication being provided for informational purposes only. This material is not intended to be relied upon as a forecast, research, tax or investment advice.