Roth IRA for Education
 By Norm Merz, CLU, ChFC
Looking for what you can do now to save for your children's future? Education expenses are growing and families
need to find ways to keep up. The Roth IRA presents some valuable planning alternatives for many parents and
grandparents.
Congress passed a law last year creating a new type of Individual Retirement Account, called the Roth IRA. The
Roth IRA allows individuals to contribute into a qualified retirement plan with after-tax dollars. The Roth IRA can be
funded with up to $2,000 contribution per year from earned income or from transferring existing IRA accounts.
When reviewing future needs, some retirees are discovering that they have no anticipated need for all of their IRA
accounts. One alternative would be to transfer a portion of their existing IRAs into a Roth IRA. But the transfer
creates a taxable event. The total amount transferred from the Regular IRA to the Roth IRA is taxable in the current
year transferred. In other words, if $25,000 is transferred to a Roth IRA in 1999, the total $25,000 will be considered
as ordinary income for the tax year 1999. It is ill-advised to pay taxes on the transfer from the IRA funds
themselves. The taxes should be paid from funds outside the IRA account.
Funds can be withdrawn from the account tax-free after five years. For example, a $25,000 Roth IRA account that
grows to $50,000 can be withdrawn income-tax free.
This type of account is ideal for parents or grandparents, older than 59 ½ years old, who would like to contribute to
the education of their children or grandchildren. Education tuition paid to an institution is exempt from gifting
limitations. In most circumstances, you can give an individual a gift of up to $10,000 without paying gift taxes. But
when paying for tuition costs, as long as those costs are paid to the institution, it is exempted from the annual
$10,000 gift limitation.
The key for families preparing for educational expenses is to have a financial plan. By having a financial plan and
using the Roth IRA, families can save thousands of tax dollars, and instead, use the money to invest in their
children's future.
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