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THE BASICS OF MONEY

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HOW TO INVEST, MANAGE YOUR MONEY AND SPEND WISELY

Home > Basics of Money > Getting Started

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Roth IRAs
This retirement-savings account can serve as a fall-back fund for paying the college bill.

Roth IRAs were built for retirement. They're not ideal for college savings, but the tax rules include provisions that can help education savers in a pinch.

If you can afford to save more than the $2,000 annual maximum for the Coverdell ESA, consider putting additional funds in a Roth IRA, where your contributions might serve a double purpose. The Roth allows you to take out your contributions at any time, tax- and penalty-free, so you can tap those contributions for college expenses if you need to or let them ride for retirement if you don't.

Here's how: A husband and wife can each contribute up to $4,000 annually to a Roth. (The contribution will increase to $5,000 for 2008.) Say the couple starts out on this path with a newborn. They could accumulate $174,000 in contributions over 18 years.

That sum could then be tapped for college bills or left to continue growing for retirement. The earnings on those contributions (another $208,000 in a pair of fully funded accounts that grow at 8% per year) could be withdrawn penalty-free if used to pay college bills (but tax would still be due if the parents are under age 59½). Or earnings could continue to grow inside the accounts and be withdrawn tax-free by the couple when they retire.

Tax Credits for College Expenses



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