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529 vs. ROTH IRA (GREAT COLLEGE SAVINGS STRATEGY) - YouTube
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have you been thinking of saving for
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your child's college education
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you've probably heard of a 5 to an n
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plan is that the best way to go about it
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what are the pros and cons of a 529 plan
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which 529 plan should you choose
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or
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should you contribute to a roth ira
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instead
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in this video i'm gonna explain all of
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these things through five q a style tips
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and i'm gonna share a word of caution at
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the end
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[Music]
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question number one should you say
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through a 529 plan
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now a 529 plan is an investment account
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that you can use to save for your
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child's college and now you can also use
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it for k to 12 expenses 529 plans are
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usually sponsored by states
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and
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so if you live in dc there's going to be
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a dc 529 plan
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maryland has their own 529 plan
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but does that mean if you live for
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example in california you should just go
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with the california 529 plan well not
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necessarily and we'll get to that in a
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little bit
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question number two what are the
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advantages of a 529 plan why would you
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want to save for your child's college
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education using a 529 well i'm going to
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give you three main reasons
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one
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you can invest
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your savings your child's college
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savings through a 529 plan so that means
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you can invest it in either stocks or
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bonds and it can potentially grow versus
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just letting it sit in a
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checking account
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second reason why you should consider a
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529 plan is it can potentially grow
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tax-free
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so for example if you put this year ten
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thousand dollars in a 529 plan
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you manage to grow it to for example 20
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000
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over the next 18 years you don't have to
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pay taxes on that ten thousand dollars
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that you made inside that 529 plan now
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assuming that you use it for education
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expenses third reason in some states not
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all
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but in some states you can deduct your
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529 contributions
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from your state income tax return which
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means it's tax-deductible it can
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potentially be tax-deductible in your
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state
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so in other words you can get a tax
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benefit from the federal government
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because it's growing tax-free and from
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your state so
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in this graph which is which was
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published in the journal of financial
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planning several years ago we can see
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the benefits of three different types of
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savings towards your child's college so
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this is assuming that the parents saved
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64 000
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over the course of many years
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and in the first
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column we can see that if you just let
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it sit in checking count there is zero
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savings or zero benefit of doing that if
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you
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invested your savings in an investment
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account in a taxable brokerage account
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and you invested it in a certain way in
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this example
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you would have made around 29 000 in
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earnings so that's your benefit of doing
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that
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in the third
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bar graph we can see that
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you can also have invested in the same
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way and you would have earned the same
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amount that blue
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solid
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box over there but in addition to that
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you get additional tax benefits from the
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federal and in this case the state
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government
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a 529 plan of also offers some
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flexibility so
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not just tuition you can also use it for
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room and board computers
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books
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and if for some reason your daughter
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gets a scholarship in college and she
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doesn't get to use the 529 savings that
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you set aside and she goes to grad
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school she can also use that for
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graduate school you can also change the
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beneficiary so let's say your teenage
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daughter you get into a fight with your
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teenage daughter
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you can tell her you know what i'm gonna
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cut you out from your 529 plan
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i'm just kidding hopefully it doesn't
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ever come to that but you can change
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your beneficiary so let's say
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your daughter got a scholarship you can
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change it to you can change the
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beneficiary to your to your son
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or if they both are super smart and get
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scholarships you can even think about
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using it for your own graduate school or
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maybe you want to get a phd someday you
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can use it for that too
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question number three what are the
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disadvantages of a 529 plan well a 529
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has
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many great benefits it also has a few
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cons that you need to be aware about
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remember when we said that you don't
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have to pay taxes on the earnings well
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that's only true if you use it for
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education so if your only child decides
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not to go to college then
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when you have to take out the money that
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you saved in a 529 plan you have to pay
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taxes on the earnings and for some
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reason
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you wake up one day and you say you know
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what that 50 000 that i saved in my
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529 plan i'm just going to take it out
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and buy a tesla i feel like doing that
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well if you do that
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you're going to have to pay a 10 with
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royal penalty because you're not using
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it for education
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so if you're getting convinced that you
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should open a 529 plan question number
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four
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where should you open a 529 plan
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and i'm going to give you here your
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favorite popular answer which is it
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depends
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if you live in a state that offers tax
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deductible benefits and the investment
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options of that 529 plan is really good
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then you might consider contributing to
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your state's 529 plan if you live in a
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state that does not offer tax deductible
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benefits let's say in california or in
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new jersey and there are many other
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states that don't give a
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state tax deduction
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and the 529
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investment plan options there are not
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that good then you can consider shopping
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around
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check out the other 529 plan in other
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states
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and this is really where a financial
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planner can be of assistance
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now we come to the fifth and final
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question 529 versus roth ira
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which is better
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now some families including a few of our
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clients hesitate about contributing to a
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529 because
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they're worried that maybe their child
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won't go to college or maybe they've got
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a scholarship
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and they'll end up paying taxes in a 10
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withdrawal penalty
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some of them might have a spouse that is
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a uk citizen or a german citizen and
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college in europe is generally cheaper
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than the way that oh maybe
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my 529 savings i won't be able to use
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that for that and i'll end up paying a
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penalty
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there is an advanced alternative that
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some advisors
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might have you consider which is
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contributing to a roth ira
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for your child's education
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why because if you do that you can take
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out your contributions not earnings but
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your contributions without
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any tax implications or without any
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penalty so it gives you a lot of
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flexibility
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now
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529 versus roth ira let me give you my
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quick thoughts on those
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if you're eligible for a roth
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and you have limited funds
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roth is a very attractive feature
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for the same reason that i just
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mentioned you can take out your
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contributions at any point in time
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and you can use it for college or if you
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change your mind you can designate it
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for your retirement now
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the main thing that you have to think
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about is there's
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no ready-made portfolios
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like that in the 529 you have to know
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how to invest those roth ira
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contributions
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now if you can potentially do both 529
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in a roth ira i would say why not do
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both right you
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contribute to roth ira get the benefits
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from that contribute also to a 529 get
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the benefits from that
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worst case scenario your 529 savings if
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you can't use it for your child's
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college education for some reason
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then you just pay taxes on the earnings
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just like you would have had anyway if
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you invested it in a regular
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taxable brokerage account or just like
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what you do if you're contributing to a
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pre-tax 401k right it's growing tax
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referred but you have to pay taxes when
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you take it out at the end so let me
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know in the comments section i'm curious
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to hear
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whether you decide to save for your
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child's
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college education through a 529 or
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through a roth ira
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a word of caution
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though if you're contributing to a 529
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plan there's an option to choose target
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date portfolios based on your son or
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your daughter's
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age so for example
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if your child is gonna
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go to college by 2038 then there is a 28
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portfolio that you can choose to invest
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your 529 contributions
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now
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just be careful of those target date
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portfolios because in some cases not all
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but in some cases
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it might be too aggressive
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based on your circumstances so what do i
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mean by that if your
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child is
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only three to four years away from
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college
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some target
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date 529 portfolios that i've seen still
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have
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that
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specific target date portfolio invested
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in 40 stocks now personally for me
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if you're gonna need the money in three
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to four years
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40 stocks i feel like that's too much
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money in a very volatile investment
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that's really up to your risk tolerance
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but
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i just think that you need to be aware
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of that now if you decide to contribute
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to your roth ira for your child's
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education
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retirement
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do check out our video on three common
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mistakes with roth iras and if you're no
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longer eligible for a roth ira but want
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to learn a legal hack
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to be able to still do so please do
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check out our video on how to do a
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backdoor roth ira
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