Q: I read that I can use IRA money penalty-free to pay for college expenses. Is this a better way to save for college than a 529 savings plan?
It's true that you can use your IRA to cover college expenses without paying an early withdrawal penalty. However, there are pros and cons to this approach versus more traditional college-saving methods like the 529 savings plan.
For example, your 529 savings plan may offer a double tax advantage on the state level. Many states allow savers to deduct their contributions on their state tax return in addition to the benefit of tax-free withdrawals. Plus, 529 contribution limits (above $400,000 in many cases) are much higher than annual IRA limits ($5,500 in 2018).
On the other hand, IRAs allow you the flexibility to use the money for non-education purposes. If your child gets a scholarship, doesn't go to college, or otherwise doesn't need all of the money, you can simply let it grow as part of your retirement nest egg. With a 529, you'll get hit with a 10% penalty for non-education withdrawals.
Furthermore, with an IRA, you can invest in virtually any stocks, bonds, and funds you want -- you aren't limited to the investment choices of your 529.
As a final thought, if you do decide that using an IRA for college savings is right for you, I suggest using a Roth IRA. Traditional IRA withdrawals are considered to be taxable income, and a large withdrawal for college expenses could easily catapult you into a higher tax bracket -- especially if you're still working while your kids are in college.
