WrapManager's Wealth Management Blog
When life changes, we can help you thoughtfully respond.

Is it Better to Fund College Expenses from a Taxable Joint Account or an IRA? -  Doug's Quiz Corner

Posted by Doug Hutchinson | CFA®, Director of Research and Trading
May 16, 2017

Mutual Funds Tax Quiz

Quizmaster Doug Hutchinson presents his monthly wealth management test. This month he quizzes your knowledge on whether it’s better to pay for college expenses from a taxable joint account or an IRA.

Consider this Scenario:

Your friends Rick and Andrea have a granddaughter, Alexis, who is getting close to college age. Rick and Andrea would like to help out with college expenses and they are considering two options to fund a tax deferred investment account for Alexis' college expenses.

Option 1: Rick and Andrea would take out $11,000 from their taxable joint account.  Assume they are able to take this withdrawal without triggering any taxable gains.

Option 2: Rick and Andrea would both take a $7,500 withdrawal from their respective IRAs three years from now.  Assume they have a 20% tax rate and they will not have any early withdrawal penalties.  The amount that gets invested will be net of taxes.

Assume Alexis' college account will have returns of 7% each year for the next 5 years. 

Which option will have the highest value at the end of 5 years when Alexis will start college? 

A) Option 1: $11,000 withdrawal from the joint account

B) Option 2: $7,500 withdrawals from their IRAs three years from now

C) They will have the same value



A) Option 1 is the best answer

Here’s how we know…

Option 1:

Year 1: $11,000.00 x 1.07 = $11,770.00

Year 2: $11,770.00 x 1.07 = $12,593.90

Year 3: $12,593.90 x 1.07 = $13,475.47

Year 4: $13,475.47 x 1.07 = $14,418.76

Year 5: $14,418.76 x 1.07 = $15,428.07

Option 2:

$7,500 * (1 - 0.20) = $6,000 after tax amount for each account at start of Year 3

Year 3: ($6,000 + $6,000) x 1.07 = $12,840.00

Year 4: $12,840.00 x 1.07 = $13,738.80

Year 5: $13,738.80 x 1.07 = $14,700.52 

In this particular scenario, it makes the most sense for Rick and Andrea to go with Option 1 since that option will have the highest value after 5 years. Rick and Andrea should consider seeking guidance from a financial planning professional who can help them work toward achieving their unique financial goals.

Know someone that you think would benefit from talking to a wealth manager about college savings options for their children or grandchildren? The wealth managers at WrapManager can help explain what options are available to help. Get started by calling 1-800-541-7774 or contact us here to get in touch with one of our Wealth Managers. 


Check out another quiz from Doug's Quiz Corner!

This quiz is intended for informational and illustrative purposes only. This quiz is intended for informational and illustrative purposes only. This material is not intended to be relied on as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The information presented is general information that does not take into account your individual circumstances, financial situation or needs, nor does it present a personalized recommendation to you. The information and opinions contained in this material are derived from sources deemed reliable, are not all-inclusive and are not guaranteed as to accuracy.

The information presented by WrapManager, Inc. is general information only and does not represent tax or legal advice, either expressed or implied. You are encouraged to seek professional tax advice for income tax questions and assistance. WrapManager, Inc. does not advise on any income tax requirements or issues.


Tax Planning Doug's Quiz Corner college savings