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529 College Savings VS IRAs: Why Your Children Should Have BOTH

September 30, 2015

My recent post about opening IRAs for your children has landed me lots of questions! I am so pleased that people are connecting to this! 

One question in particular bears some clearing up. An old colleague of mine wrote me on Facebook saying that he uses 529s to save for his kids. These are awesome investment tools too but for a very different purpose than the IRA I proposed. So let me specify the difference: 

  • 529s are tax-protected savings plans for the purpose of paying for higher education. So college most likely. If you do not use this money for education, you are penalized pretty heavily with taxes and fees when you withdraw. College costs a lot of money and tuition is rising. Having one of these plans in place is super smart planning, especially when the kids are small. However, this money does not give them life-long savings. It secures only their educational choices. 
  • IRAs on the other hand, are for long-term savings. They have nothing to do with college. The money that is earned and saved inside the IRA will not be usable for your children until they are 59 1/2 years old. It seems like ages and if your youngest is 3 like mine is, it certainly is. But this is building wealth for your children well into their adulthood. Again, we are talking about generational wealth that they can then pass down to their children without further taxation. Used correctly, this is one heck of a trust fund! 

We have both 529s and self-directed Roth IRAs for our children. I will share my 529 philosophy and hacks in another blog post. For now, what is worth noting is that we don’t make our children contribute to their own 529 plans. They have not expressed a desire to go to college yet. They are 3 and 5 years old. They barely know what college is. College is still OUR dream for them and not yet their own. Therefore I think it only fair that we pay into that dream while they are still so young.

However, they ARE expected to contribute to their IRA with their own income and labor. This is what the government mandates. They must have income to have an IRA and they must earn that income in my house. I specified how in my previous post

I will also make it a point to write about how (and why) I manage my own self-directed IRA. Please do stay tuned for that and as always, if you’d like email updates, clickety click below! 

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