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Evaluating the Most Efficient Way to Save for a College Education – Doug’s Quiz Corner

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

August 17, 2018

What Are the Advantages of Using a Roth IRA vs. traditional IRA vs. a 529 Plan When Saving for College Costs?

Consider this Scenario:

Your friends Dan and Ashley have a son who will start college in 7 years. They would like to save some money for his college fund, but they are unsure about the best way to do so.

Right now they have $10,000 in cash set aside for this purpose. Over the next few years, they’d like to continue saving more money for his college education.

To make the most of what they’ve already saved, they’re considering putting the $10,000 into a 529 plan, into a traditional IRA ($5,000 into Dan’s and $5,000 into Ashley’s), into a Roth IRA ($5,000 into Dan’s and $5,000 into Ashley’s) or doing some combination of these options.

Assume that Dan and Ashley will receive a full state tax deduction on a $10,000 contribution into a 529 plan. Also assume that they meet eligibility requirements to contribute $5,000 each into their traditional IRAs and/or Roth IRAs.

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