Roth IRA vs 529 Plan - YouTube

today I'm going to talk about the Roth IRA verse the 529 plan for college

planning or education planning in general we're gonna compare the two

there's your first time at our channel or you haven't subscribed click on the

subscribe button at the bottom my name is Travis Sickle CERTIFIED FINANCIAL PLANNER

with Sickle Hunter Financial Advisors

so today we're going to talk

about the five points we're gonna compare the Roth IRA versus the five to

nine plan and hopefully by the end you can make a more informed decision course

along the way I'll give you my two cents to kind of help you so we're gonna start

with the flexibility the flexibility of the Roth IRA and the five to nine plan

we're gonna talk about the flexibility on the investments so if we're looking

at the actual investments I'm gonna go ahead and I'm gonna start with the five

to nine plans so I'm gonna pull these up on the screen here in a second but

before I do the five to nine plans what they do really really well is they make

it easy to make an an investment choice so if you'll see here I'll pull it up on

the screen you can see this is the Florida's 5t9 plan also called the

savings plan and you can see that it's really straight forward we're looking at

more aggressive on the Left all the way over to the right which is more

conservative and it sounds pretty good so really in the beginning a lot of

people are probably gonna choose the stock fund or the all equity portfolio

and this is going to be the more aggressive one but if you're thinking

that you're 18 years away from college or when you're gonna use these dollars

it's probably a wise choice to take on a little bit more risk but if you want to

be more conservative you can and again it makes it really really really simple

if you scroll down here and we look at the blended equity portfolio so this

isn't a ready-made portfolio that's completely diversified with just

equities or then you look at the balanced portfolio now here's where I

tend to question whether or not these portfolios are really doing what we want

them to do because these are holding only bonds but they're holding bond

funds and bond funds are gonna have a lot of characteristics or they're gonna

act a lot like an equity so they're not quite as conservative as you might think

so that's just something to understand and consider and if you scroll down here

you can see all the other pre-built portfolios and if you look at the top

you can look at the investment managers to figure out which actual mutual funds

are inside of each of these so if you look at the top you see Columbia

management investment advisors and that is 50 percent of the fixed income fund

so if you look at the fixed income you can see that it is or excuse me you can

look at the balanced portfolio we know that it's v in this particular case it's

50 percent fixed income and 50 percent equities so again if we go back to the

portfolio's balanced portfolio 50 percent fixed income so that's how you

can figure out and you can look a little deeper you can look up the fund seeing

how it it compares to other funds in its category and just get a better feel for

the investment choices now another 529 plan the New York plan

and I chose this plan because it has primarily Vanguard funds it might be a

hundred percent but what I wanted to show you on this so at the very top of

this website you could see that there's individual portfolios age page age based

portfolios which I'll talk about in a second but let's take a look at the

individual portfolios and you can see right here that the aggressive growth

that first one right there has two separate Vanguard funds the

institutional stock market fund and the International stock fund if you scroll

down you can see all the different portfolios and they all seem to be the

Vanguard funds I don't think there's anything else different in this one

except the Vanguard funds and then you can see the bond portfolios at the at

the bottom you can see that they have actually a bunch of different bond

portfolios in this one the nice thing is you can use any 5t9 plan you want if you

use the one from your state and you have stadium contacts you might have another

benefit there but you can have to look at your state to figure out if there's a

credit on your state income taxes there won't be anything as far as which 5t9

plan you should use as far as your your federal income tax is concerned they're

all going to be the same and you can use another state

like I said before you can also switch between states although it's not quite

as easy because you have to open up in your application you have to roll the

money over there's a lot more that involved that goes into it but just know

that you do have that option so if you don't like your state's 5t9 plan you

can't switch now let's take a look at the Roth IRA so let's get that off the

screen for a second and with the Roth IRA for college planning or really

anything that you're looking at the Roth IRA for you can invest in basically any

security that you want so if you want it invest in the same exact portfolios at

the 529 has you can or you can go with a individual stock or an ETF or mutual

fund or an individual bond or another bond fund if you choose now the thing I

like about the flexibility in the Roth IRA that with the bonds if you want to

own an individual bond or you want to be really conservative when you're one year

out or you're in college and you want to flip it over to maybe CDs or some fixed

income you can that option those individual options are not available in

the five to nine plans and sometimes that flexibility could be very welcomed

especially if you have a downturn in the market and you want to be a little bit

even more conservative so it's not just about getting a better rate of return

it's also about protecting your assets - so the Roth IRA is going to be the

winner in this first one looking at the flexibility on the investment choices

now number two is looking at the financial aid and this is a big one

although I'm not going to go too deep into it with the Roth IRA it's a

retirement assets not included in the expected Family Contribution with the

five to nine plans certain amounts could be subject to five point six four

percent reduction in financial aid now again it depends on your particular

situation when we're looking at the flexibility of financial aid

I like the Roth IRA better because it's not going to be included in the expected

Family Contribution although if you do keep the amount below a certain

threshold with the five to nine plans then that's a different story then it's

not counted in the expected Family Contribution but between the two the

Roth IRA is the winner in the flexibility for financial aid number

three is going to be looking at the contribution limit with the Roth IRA for

the contribution limit it's 5500 unless you're 50 or older then

it's an additional thousand it's 6500 so for most with children they're going to

be able to save fifty five hundred its to the max with the 529 plan however

that has no limits on the contributions it's actually limited on the amount that

you can have in the 5t9 plan but really that's not much of an issue and that's

not what we're going to talk about today we're just gonna be talking about how

much you can save so really the limits on the 529 you're

probably looking at the gifting tax so you don't have any taxable events on the

five to nine contributions and that's going to be 15,000 for 2018 and beyond

at this point so its 15,000 and that is not total so its 15,000 so if you have

two kids it's thirty three kids forty-five so you can contribute quite a

bit to the five to nine plans although with the Roth IRA it's fifty five

hundred because it's going into your retirement account and that's it now if

you have a spouse if you do an additional fifty five hundred but those

are the limits so as far as the contributions go the 5t9 is the clear

winner now number four has to do with the taxation of the 529 plan in the Roth

IRA and this isn't as straightforward so they both go in after tax so you get

your paycheck it's the money that's in your bank account and you put it into

either one of these two accounts they're exactly the same as far as that's

concerned and hopefully over time those accounts grow and that growth is going

to be taxed efforts you're not gonna be taxed on that either now as far as the

money coming out that's where it's a little different with the Roth IRA you

can pull out the contribution so anything that you put into the Roth IRA

so that's fifty five hundred that we spoke about before that fifty five

hundred that you put in you could take it out whenever you want because that's

what you put into it now the growth if you're under the age

of fifty nine and a half that will just be taxable as ordinary income so it's

just as if you're getting the income that's growth that you haven't paid

taxes on but if you're taking it out for education planning you're gonna just pay

ordinary income tax on it so not ideal but you could still pull out that fifty

five hundred so every year that you put in the 5500

and accumulates you could pull it all out you could pull it all out when it

comes time for college planning or education planning with the 529 plan it

could all come out tax-free for education planning as long as it's for

education K through 12 or college it comes out tax-free so for the taxation

I'm gonna give this one to the 529 plan because it has a little bit more

flexibility as far as a taxation goes now point number five is the flexibility

on the actual usage of it the Roth IRA was designed for retirement so it's a

good retirement vehicle but it can also has the flexibility to be used for

education planning the 529 really is exclusive for education planning and

that's it so you can only use it for education planning now if your kid gets

a scholarship you can pull the money out up to the scholarship amount you can

pull that out but it's still gonna be taxed you're just not going to get a

penalty on it any money that you don't use you can roll to another beneficiary

but really that money is gone it's it's out of here and if you take that money

out for anything but education planning then you're going to get a 10% penalty

in addition to the ordinary income whereas the Roth IRA has a little bit

more flexibility because you can use it for your future or you can pull it out

for whatever you want which is another reason I like it so if you want to use

these dollars when you're pulling out for say travel or an airfare to get your

son or daughter back home for the holidays you can use the Roth IRA the

529 plan you can't use for airfare you can only use it to basically anything

that you can write a check to the University for so there's a little bit

more flexibility with the Roth IRA now this is the the biggest thing that you

need to be aware of when you're dealing with or making the decision between the

Roth IRA and the 529 plan first you can use both you don't need to use just one

or the other so that's okay too the next piece is retirement planning

once you take into consideration other goals you want to make sure that your

retirement is all set up because that is not something that you could take a loan

for but you can take a loan for college planning so really those two points are

really important to make sure that you're planing correctly but if you're

just trying to choose between the Roth IRA and the 529 plan I think that these

five points are a good starting point to figure out which one you want to choose

if you have questions on the Roth IRA or the 529 plan go ahead and leave the

comments down at the bottom I'll be sure to answer them in future videos if

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