Using Roth IRAs For College?

Gwen and her husband have been putting $400 a month into Roth IRAs in order to help their children go to college. They're debating whether or not to continue this or use that money to pay toward their mortgage.

QUESTION: Gwen in Wisconsin and her husband have been putting $400 a month into Roth IRAs in order to help their children go to college. They’re debating whether or not to continue this or use that money to pay toward their mortgage. Dave advises against using Roth IRAs to save for college.

ANSWER: I do not use Roth IRAs to save for college. That is a mistake. You can use the Educational Savings Account (ESA), which allows it to grow tax-free for the kids’ college, and use your Roth IRAs for you. You’re making a mistake with that. You should be funding Roths for you because they grow tax-free and funding ESAs for your kids. You can put about the same amount into an ESA—$166 a month each, so it wouldn’t be quite $400—and you could fund two ESAs and still probably pay off your house.

Even if you’re planning to cash flow college, something might happen and you can’t. It’d be good to have some money set aside for college. It’s not going to be much. It’s only $2,000 a year for five years plus some return, so you might have $15,000 for the oldest one and maybe $20,000 or $25,000 for the youngest one.

I don’t know where you got the bad advice to change, but it was bad advice. The ESA in a good growth stock mutual fund is what I’d be doing for both of them. I would fully fund those two things and plan to cash flow the difference.

You guys are being very proactive top to bottom in how you approach this. Having my third and last one in college now in his junior year, I think you’re way ahead of the game on all of your considerations here. The only thing I would add if you haven’t already done it is to start talking about ACT scores and SAT scores and take the test more than once—probably three times. Each time after they take it, put them in tutoring on how to take the test. All three of mine took the test three times. All three of mine got a better score each time. That qualifies you, as you know, for a lot of different scholarships and grants and other things that you can get a hold of that you might not otherwise that could be based somewhat on academics or at least opens up some doors for them and teaches them some lessons. The ACT, the college selection, saving and investing, and work while you’re in college—those four things together, which all involve parenting, that’s how we’re getting people to go to college debt free.

A paid-for mortgage won’t send them to school. Money in the bank will in case you had the most inopportune time for a layoff.