Money Mommy

Stuff your mom should have taught you, but didn't…


Author: MoneyMommy

Can I afford that?

The American Dream: Own your own home. Buy a car. Take a dream vacation. But can you afford it?

It’s very easy to figure out. Do you play to buy a house, a vacation home, a car, a new roof on credit? Decide how much your monthly payment will be. Let’s say you want to buy a car and you are willing to pay $500 per month. Okay. Let’s take that $500 for a test drive. Before you buy that car, start putting $500 away each month in a separate account. Do this for 6 months. Do NOT touch this money. Remember, if you had actually bought the car, that money would be gone anyway. Take stock at the end of these 6 months. Were you able to put that money away each month? Are you willing to continue paying $500 until your car is paid off? If the answer to both questions is yes, then you can afford the car payments. Don’t forget to include gas and maintenance in your new budget.

Want to buy a house? Same steps. Figure out how much your monthly mortgage payment could be. For illustrative purposes, we’ll assume $1,000. Start putting that money aside each month. If you are currently paying rent in the amount of $500, you can add that amount to your available monthly mortgage calculations. Because this is such a long-time investment, I would encourage a full year of putting this amount aside. At the end of the year, it will be time to take stock. Are you able to meet a mortgage of $1,500 per month. Don’t forget insurance and property taxes should be included in your mortgage calculations along with principal and interest payments. Also, your housing budget also cover utilities and maintenance of your new house.

If, after this exercise, you feel that your purchase is affordable then it’s time to purchase. What to do with the money you have saved? It can be used for a down payment. It can be kept as your 6 month emergency fund. It can be a combination of both. When Marie bought her first home, she had saved up $10,000 more than needed for the closing costs. After much consideration, she opted to keep it for an emergency fund rather than immediately paying down the mortgage. Two months after moving in, she was laid off. It took another three months to find a new job. Meanwhile, she was able to make her mortgage payments using her savings. She did not enjoy seeing her savings diminish, but her lender received her monthly payments, her credit remained good, and there was no worry about late payments.

How about new shoes or a great vacation? Again, put that money aside to see if its in your budget. If, after 6 months of savings, you haven’t saved up enough to cover this consumer want, you can’t afford it!

Returns are lower in IRA’s and 401K’s, Right?

I recently had someone tell me that they couldn’t make as much money in their IRA or 401K as they could if they just left their investment dollars in a regular taxable account. Huh?

Typical investment places include bank accounts, stocks, bonds, mutual funds, ETF’s. Money saved and invested in these places can be your taxable funds, as well as IRA’s and 401K’s.

The simplest and safest place to put your money is in a bank CD. You will earn a pittance in interest, but your money will be safe. Both your taxable money and your IRA money will earn the same interest rate. At the end of the year, interest earned in your taxable account must be included in your yearly taxable income, but the interest in your IRA will not be taxed.

Likewise, you can purchase $300 worth of stock from Company X with either your taxable money or your IRA money.  Let’s say you picked a great stock and your money nearly doubled! You choose to take your profit and you sell Company X for $500.00.  You now owe taxes on $200.00 if this was in your regular account. That same $200 profit earned in the IRA will not be taxed.

401k’s work essentially the same way. Generally, there is a more limited investment choice of mutual funds for your 401K dollars which will make an exact comparison a little more difficult. The concept is the same. If a mutual fund goes up; every account that has invested in that fund will go up whether it is a 401K, IRA, or regular account.

Whatever investment you have in a taxable account will be taxed the year you receive that money. This includes dividends and interest that may be reinvested. Whatever investment you have in a Traditional IRA or 401K will not be taxed UNTIL you actually take funds out at retirement. If you have these funds in a ROTH IRA or Roth 401K, you may never pay taxes on them.

So to be clear – whether you invest in regular accounts, IRA’s, or 401K’s, your money will grow at the exact same rate. What changes will be the tax you pay.  But that is for a later blog.

Roth IRA’s – One Size Fits All

OK.  Maybe not all.  But most.  Whether you are just starting out or well into your career the Roth IRA will provide you with an exciting way to save on taxes and ultimately hold onto more of your money.  I recommend it as the vehicle to save for that all important emergency fund, first home, college fund, and, of course, retirement.  And, let’s face it, unless you plan on kicking the bucket in a few short weeks, who doesn’t need an emergency fund or retirement fund?
The Roth IRA has one awesome characteristic.  All monies contributed to your Roth IRA are after tax dollars.  That means you pay your tax before you invest it.  All earnings from your IRA remain untaxed in your IRA until you withdraw these funds.  This includes interest, dividends, capital gains etc.  When you withdraw money from your Roth IRA after your 59 1/2 birthday (and your IRA has been open at least 5 years), all these funds will come to you totally tax free.  If you withdraw money earlier, then  any increase in your Roth IRA is subject to taxes and penalties.
But what about your initial contributions? Because the tax has already been paid on the contribution to your IRA, that amount can be taken out without tax or penalty.  Stash your  funds in a ROTH IRA and that money will remain available to you whenever you may need it.  Any earnings should be left if for the long run, but the original contribution may be taken out in an emergency with no adverse effect (other than decreasing your retirement savings).  If you need to tap these funds, simply withdraw the original contributions and leave the earnings for your retirement.  You will not have any penalty or additional tax to pay.
At the end of the year, you will receive a 1099R stating the amount of money that you have withdrawn from your account.  This must be listed on your 1040 federal tax form.  But you also get to list the original amount of your contribution.  This is known as your basis in your IRA and is simply the total money that you had invested and left in your Roth IRA.  If necessary you can withdraw funds more than once from your IRA.  Simply reduce your basis by the amount you have withdrawn in the past.  As long as you have basis, a pre-retirement withdrawal will not be included in your taxable income.
IRAs and retirement funds are not to be tapped lightly.  They are meant to provide security in your twilight years. The discipline of putting money aside for fifty years is daunting…you may be hesitant to commit funds for such a long time.  The Roth IRA encourages this savings by leaving a back door open to tap these funds.  Through the Roth IRA you will have taken your first step towards financial independence.

On Penny Pinching & Delayed Gratification

We have lost the ability to be penny pinchers.

Afraid to be labeled a tight wad, a miser, or a scrooge, we spend our lives “keeping up with Joneses” and we sacrifice our own financial security to the allure of having it all, all the time.

You can not build financial security if you spend beyond your means.  As I have stated in an earlier blog, you must plan your budget to meet your obligations, including your savings.  If these are not being funded, you do not have money for the extra stuff. I know a couple who regularly invests in a Christmas Club Account.  Kudos to them for planning ahead.  Unfortunately, they are not meeting their current bills, and rarely can pay their credit cards in full each month.  At the holidays, they joyfully present friends and family with gifts that are beyond their means.  They believe that they have carefully budgeted, instead they have put themselves deeper in the hole by allowing their credit card debt to increase and paying more and more interest.

Our great grandparents knew how to pinch pennies. If they did not have the coin to pay for a treat, they did without. Today we have no such constraints.  With a swipe of the credit card, we can buy fancy coffees, doughnuts, the latest fad toys and gizmos, a trip to the movie complete with soda and candy, the newest app, fashion apparel, sporting jerseys, the list is endless. And none of these items are required for life.  Remember the basics we were taught in grammar school: the necessities of life are food, clothing and shelter. Be sure what you are buying is a necessity and not a “want” or a “keeping up appearances” item.

Another story for you: My 90-year old neighbor (who has since died) told me about the day her boyfriend came to her and told her he would not be able to see her anymore.  It was the height of the depression and he could no longer afford the gas to drive from his farm-hand job to her house for their weekly visits.  It would be over two years before he once again came to her door.  The economy had started to improve and he was finally able to afford the gas.  Their marriage would last over 50 years before he passed away. This story spoke to me on so many levels – commitment, sacrifice, frugality.  It is hard to imagine not seeing someone for so long.  We have so many readily available technologies to stay in touch.  But the basic premise is there.  Live within your means, deny yourself the little extra luxuries that are fleetingly important (2 years compared to half a century!) and look towards your future.

Winning the Lottery!

Win the lottery! Win a new life! The allure of gaining a new life by simply plunking a dollar on the table is mind boggling.  Just one dollar for a lottery ticket. Anyone can afford that. Why wouldn’t you?

I met Benny 3 years ago.  He was one of the lucky ones. Benny won a million dollars from his state lottery when he was 35.  For the next twenty years, he would receive a check for $40,000, with the extra $10,000 going for taxes. For Benny, with a high school education and a warehouse job, this was a fortune. Set for life, he decided to quit his dead end job and live on his winnings. The years went quickly.  Benny soon discovered that $50,000 was actually a modest amount – especially since he had to pay his own medical insurance.  His lottery check remained stagnant at $50,000 each year even though inflation was slowly eroding its purchasing power. Every April, he looked forward to receiving a $4,000 tax refund from the $10,000 he had had withheld.

I met Benny 3 years before his lottery money ran out.  At 52 years old with no education and no experience, he was now struggling to find a job.  While many people his age were starting to think about retiring and social security, Benny had realized that he had not been contributing to social security and was consequently not eligible to collect. He planned to sell his modest trailer home and hope his extended family would allow him to move in.

I saw Benny again last year. He had not received a lottery check the previous year. The twenty years had already passed. There would be no tax refund that year. He came in anyway, hoping for a miracle. He had not found a job and was getting his place ready to sell. He brought in a sack of losing lottery tickets. He pushed it across my desk saying that’s all he had to report this year. And I had to tell him there could be no refund because nothing had been withheld. He went away sad and discouraged.

I hope you never win the lottery. But if you do, never quit your day job.

Smart Phones and FSA Plans

Medical Flexible Spending Accounts (FSA’s) are a great way to save money on your out of pocket medical expenses. By budgeting your expected expenses for the coming year and using your employer sponsored FSA plan, you can literally save hundreds of dollars in taxes.

It is important to remember that medical expenses must be within the FSA plan year. This means that you can only use qualified expenses occurring in the same year as the FSA.  If the plan year runs from Jan 1, 2016 through December 31, 2016, then the medical expense must occur during January 1, 2016 through December 31, 2016. If you see a dentist on December 29, 2015 you can not use 2016 FSA money to pay that bill, even if you pay it in January 2016. To use their Flexible Spending Accounts most advantageously, people often make medical appointments or purchase medical supplies and contact lenses etc in late autumn to use any money remaining in their FSA accounts.  Conversely, others choose to wait until January when the new plan year starts if they have no funds left in their Flexible Spending Account.

IRS regulations may allow employers to permit an additional 2 1/2 month grace period or allow employees to carry $500 into the next plan year. Check with your employer to see if their plan has one of these options.

Remember: although Flexible Spending Accounts are excellent tools for your financial health, they should not dictate your medical health.  Follow the directives of your health care providers for necessary appointments, prescriptions, tests etc  -Money Mommy

Depending on your FSA plan, you may need to submit your medical bills to the FSA provider for reimbursement. Or you may receive a prepaid credit card for your qualified medical expenses. Or you may put an app on your phone to request reimbursement for qualifying expenses. I have had experience with all three methods.

Medical bills can be submitted by mail, fax or email. Simply fill out the necessary form provided by your employer, gather the bills – copying or scanning as necessary –  and send them off.  Don’t forget to request payment for medical mileage. Payment will be received in a few weeks.

Using a prepaid credit card is the epitome of ease at the doctor’s office or pharmacy.  With a simple swipe of the card, medical bills are paid directly to the health care providers from your FSA account. Be aware that FSA providers often require a copy of the bill to substantiate medical expenses. If the required bills are not submitted in a timely manner, your FSA card may be  suspended until such proof is received.

Putting an app on your phone is a third option.  Many FSA providers have apps that allow you to submit medical bills by taking pictures of them.  Within a few days, your reimbursement for your qualified out-of-pocket expenditures and medical mileage will be deposited directly into your back account. Unlike the prepaid credit card, you will not need to substantiate medical expenses at a later date since you have already submitted a picture of your medical receipts with your request.

Whatever method you choose for reimbursement, don’t put off starting your own Flexible Spending Account.  You can literally save hundreds of dollars in taxes.



On Flexible Spending – Medical Expenses

The concept of Flexible Spending Accounts (FSA’s) is so simple that people think there must be a catch.  There really isn’t. You budget what your expected annual out-of-pocket medical expenses will be.  Then, you request that amount of money be allocated to your FSA account.  Your salary will be reduced by that amount, so no income taxes will be due on that money.  Although your employer is deducting that amount over the full year, the entire amount will be available to you on January 1 (if that is the start of your plan year.) It is true that you will forfeit whatever you don’t spend, but this is not as much money as you might think.  Let’s examine these points more closer.

(In 2016, the most you can contribute to an FSA is $2,550.00 or approximately $49 per week.  For my examples, I will budget $520 towards medical expenses or $10 per week.)

Budgeting for medical expenses. Let’s assume you visit the dentist twice a year for cleanings ($200), are anticipating four “well baby” visits ($140), and plan on buying new glasses ($180).  Opening a medical FSA for $520 will give you immediate access to those funds on January 1, even though you have budgeted $10.00 per week. You could choose to purchase your new glasses immediately or wait. This will give you some additional flexibility. Because, even though you have regular cleanings, you might also have an expensive cavity. In that case you could choose to put off buying glasses until next year and use the funds available in your FSA account for the unexpected dental bill. Glasses could still be purchased towards the end of the year if funds remain in your FSA account; or they could be put off another year.  You are in control.

Immediate access to budgeted funds.  If you anticipate a major medical expense, FSA accounts will allow you to accumulate the necessary funds immediately and painlessly.  A good friend informed me she needed new dentures.  She anticipated that she would need to wait six months before she saved the $520 needed for a down payment. Luckily her employer  offered FSA plans, and they were still in the open enrollment period. My friend immediately signed up for the FSA plan.  The full amount was made available to her on January 1, and she was able to schedule a dentist appointment for January 10. Her employer reduced her wages by only $10 per week.

Deducting medical expenses from your taxes. Yes, medical expenses are deductible on Schedule A of your tax form.  But for most individuals, these deductions will not affect your taxes.  You can read why on my new blog.  So, the only way to get a federal tax break for most individuals is by using Pretax Dollars from an FSA or HSA account. (But we are focusing on FSA accounts in this blog.)

Tax Savings! I just mentioned saving on your federal taxes. Most Americans are in the 10% or 15% tax bracket. This means of the $520 that we placed in our FSA example, most Americans would save $52 or $78.  Not bad.  But there are more tax savings.  Since the $520 was not included in their wages, there will not be any social security or medicare taxes; additional tax savings of $39. Nor will there be any state or local tax owed on the $520. State tax brackets range from 3% to 13%, so let’s use the middle,  8%, for illustration purposes.  In this case the state tax saved would be $41.  So, we have $520 available in our FSA.  However, we have reduced our overall taxes by at least $132.

Use It or Lose It.  This is true.  If you don’t use the full $520 during the plan year, you will lose the remaining dollars in your account.  I have had people who were wary of opening an FSA because they didn’t want to lose any of their money.  If they choose not to use the $520, they will pay the taxes of $132. This means that only a portion of that $520 actually ends up in their pocket.  In fact, in order to break even in their FSA account they would only need to spend the difference of $388 ($520 – $132.)  The rest would have gone to pay taxes. But since the entire amount was placed in the FSA account, they actually have a free bonus of $132 to use.  Remember, FSA accounts can be used for  dental work, glasses,  diabetes testing supplies, hearing aids and batteries, contact lenses and a myriad of other items as well as medical copays and prescription drugs. So if you find yourself with additional funds at the end of the year, consider purchasing some of these items.

But I’m Healthy and Have Great Insurance.  I have met a few people who are indeed blessed with great health and have equally great insurance with little to no copays, and therefor no medical expenses.  If you are in that enviable position, an FSA might not be for you.  Just know that it is there should the need every arise.  Meanwhile I’m putting in my $520 and saving at least 25% in taxes.

Thoughts on Debt and Credit

Debt. Definitely a four-letter word.  And one to be avoided at all costs.  But no, not really.  Debt is simply another tool in your financial tool box.

When you go into debt, you have borrowed money with the intention of paying it back.  (Otherwise, it is simply stealing.)  Credit is a form of debt where you get the benefit of something now, and promise to pay for it in the future.    Credit includes mortgages, car loans, education loans, business loans and certainly credit cards.

The credit industry is very active and certainly very lucrative.  Count how many credit card offers you receive in the mail; notice how often you are asked if you want a store credit card; listen to the television and radio commercials.  In exchange for paying later, you agree to pay interest every month.  The interest can easily be 18% to 30%, or as low as 0%.  Meanwhile, a whole industry has sprung up to convince you that creditors are evil and that you should not have to repay your loans.

Let me just say it: Ridiculous!  If you are old enough and mature enough to get credit; you should be mature enough to handle it.  I’ve got some suggestions for repaying your credit card debts here, but let’s take a look at some of the different types first.

If you are considering  going in to debt, FIRST consider how long you will benefit from your purchase.

Mortgages allow you to buy a house before you can save the money to buy one (or even build your own.)  Typically, mortgages last anywhere from ten to thirty years.   It seems reasonable to go into debt for a lifelong home.  Be sure to calculate the mortgage, utilities and taxes in your budget before you choose your home.  Failure to pay your mortgage would be very serious to your financial health.

Education loans are another common form of debt.  Here you are pledging future earnings for knowledge and training for a future career.  But, be very wary of taking on student debt.  You may be condemning yourself to a lifetime of debt.  I know a young couple who are starting their married life with education debt exceeding a third of a million dollars.  Ouch. Teaching is a very noble profession, but teachers are notoriously low paid.  Take the steps you can to minimize your student debt now – community college; instate and commuter schools; work study programs; apply for scholarships and grants.  Education is so important; choose carefully and wisely.

Car loans have some very low interest rates to entice a buyer.  In our car dependent society, most people see a car as a necessary luxury.  We need them to get to work, grocery shop, school, the list is endless. If you do decide to purchase a car, remember that you are in control.  You choose the make and the model, and ultimately the cost of your vehicle.  I know young people who bought a car so they could go to work.  Now they go to work to pay for their car.  It is an endless cycle.  Choose a vehicle that will fit in your budget, and aim to pay the car loan off within four years. Once you do pay off this loan, continue to place the same amount in a separate account each month.  This will provide you with funds to pay for necessary car repairs or purchase a replacement vehicle in the future.

I saved store and credit cards for last.  This form of debt creeps up very slowly and bites you before you see it coming.  Going through the drive-thru every day for breakfast or out for lunch may only cost you $10.00 a day, but at the end of the month you will have spent over $300 and have nothing to show for it.  Pay a minimal $25 (which the credit card company is quite happy with, since you now owe interest on the remaining $275), and continue the same pattern and you will owe nearly $600 on your credit card. By the fourth month your credit card bill is over $1,000 and you still have nothing to show for your debt.  Add in a few store credit cards for clothing and other “feel-good” purchases, and you are on your way to being seriously in debt.  Remember, you are in control!!  By using your credit card, you have agreed to pay your bill with interest.  The first month you can not pay off your credit card is when you stop using your credit card. If you are not still benefiting from your credit card purchases that you are still paying for months later, then you should not use the credit card to pay for them.  This is the time to use cash for your splurges.  If you don’t have enough cash – you don’t buy it.  Be in control of your own debt.

Like a chain saw, credit is an incredibly powerful too.  It must be handled carefully, or it could destroy your financial house.



The Roth IRA for College Savings

I’ve given a huge rant on why I don’t think you should use a 529 to save for college. I’ve laid out the scenario of when you still might choose to start a 529 savings account. Now you might be wondering what steps you should take to prepare for future college expenses.  The answer is quite simple: open a Roth IRA.

When you open a 529 account, you do not get any deduction on your federal taxes.  However, as the money grows, you never pay taxes on the growth – provided you use it to pay qualified education expenses.  The mere fact that the growth will not be taxed  is the only advantage that a 529 has.  The ROTH IRA has the exact same attribute, but without many of the restrictions that make the 529 so unappealing.

The IRA was conceived to be a retirement account: Individual Retirement Arrangement.  At age 59 1/2, you can take out funds completely tax and penalty free, as long as your IRA was started at least 5 years ago.  Taking it out early would incur some penalties, but there are notable exceptions. Among the exceptions is using your IRA to pay for college.  You can use your ROTH IRA to pay for college for yourself or your children with NO penalties or tax consequences.  Exactly the same way a 529 works.

However, there are additional benefits to placing college savings in an IRA over the 529 account.

You will still be eligible to receive education credits such as the Lifetime Learning Credit or American Opportunity Credit if funds are taken from your IRA.  If you use funds from a 529 Account for education expenses, these same expenses will not be counted when you calculate the credit.  Remember, the American Opportunity Credit alone is worth $10,000 in tax savings.

By law, money saved in retirement accounts (such as the IRA or a 401K) are not included in the FAFSA calculations to determine federal student aid. On the other hand, money saved in a 529 account counts heavily against the student aid that will be made available.  FAFSA also examines your adjusted gross income, as shown on your 1040, to calculate student aid.  Money taken from a ROTH IRA for education benefits will not be taxed and will not be included in your adjusted gross income.

Because the government wants people to plan for their retirement, they first offered the Saver’s Credit in 2002 as an incentive to the populace to take an active role in their financial security.  Depending on your income, you could save up to $1,000 off your taxes for saving money in an IRA, a 401K or a 403B.  Once again,  the 529 is not eligible for this credit.

Finally, (and this is BIG) you are not limiting your scarce investment resources to pay for just one scenario.  If you do not need the money for college, the money you saved in the ROTH IRA is still available for your own personal retirement. It is your own account in your own name. There will be no penalty when you take it out for retirement.  There will be no taxes when you do take it at retirement.  However, that money had been available to be used exactly the same as if it were in a 529 account if you had needed it.


  • Your education tax credits are not limited because you used funds from a 529 account.
  • Your federal student grants and loans have not been decreased because you have funds in a 529 account.
  • You can use funds earmarked for education in your ROTH IRA to receive the Saver’s credit.
  • You can use the funds originally saved for education for anything you want if they were placed in a ROTH IRA (subject to age requirements).
  • You have not limited your options at all.


But you have saved.






Flow Chart for a 529

The 529 is a valid option for saving for college. You place money for future college expenses in a special account called a 529.

These accounts were named after Section 529 of the IRS code that originally created them back in 1996 in response to the need to save for ever rising college costs.  The concept is simple.  You set money aside in a special savings account administered by a state or educational institution.  There are no federal tax savings when money is first placed in the account, although many states will allow a deduction off the state income tax.  However, there will be no tax on any future capital gains, interest or dividends if funds are later withdrawn for qualified educational expenses.  Depending on your tax bracket, you could save a full one third of this future growth that would otherwise be forfeited to federal taxes.

Let me repeat, the 529 is a valid option for saving for college for some individuals.

Let’s do a simple flow chart and see if they are for you.

First, are you contributing enough to your 401K at a work to receive the maximum amount that your employer will match?  If your employer matches the first 5%, then you should have 5% allocated to your 401K.  If he matches the next 3% at only half as much, then you should still allocate an additional 3% for a  full 8% to your 401K.  You have just doubled the first 5% of your savings.  The next 3% received a fifty percent boost.  No other investment offers such immediate guaranteed returns.

If you are maximizing your 401K, read on.  If not, then the 529 is not for you.

Second, are you fully contributing to your IRA?  Currently (2016) you can contribute $5,500 to an IRA – either Traditional IRA, Roth IRA or a combination of both. (i.e., $3,000 to a Traditional IRA and $2,500 to a Roth IRA for a combined total of $5,500.)  Individuals over 50 can contribute an additional $1,000 as a catch-up contribution.  IRA’s can be funded for both the husband and wife provided at least one spouse has taxable earned income of at least the current year’s IRA contributions.  IRA’s can be opened at any bank or brokerage house.  You should check with your tax advisor before opening your IRA and then you should fund your IRA every year.

So, if both you and your spouse are fully funding your IRA, read on.  If not, then the 529 is not for you.

Do you expect to apply for and receive financial aid in the form of federal grants and loans?  When my husband and I filled out our first FAFSA form for our eldest son, we were amazed how much we were expected to contribute to his education. We were further dismayed to learn that the 529 we had diligently saved counted directly against us when it came to determining how much federal financial aid he would receive.

If you do not expect to receive any financial aid, the 529 my be for you.  If you expect/hope to receive federal aid, then the 529 is not for you.

Will you be eligible for education credits such as the American Opportunity Credit, Hope Credit or Lifetime Learning Credit? One of my favorite moments when completing taxes is asking parents for their students 1098T college tuition statements.  If their income is under $80,000 ($160,000 if filing joint), they are eligible for the American Opportunity Credit (AOC).  The AOC can reduce the tax bite by a full $2,500 for each of four years, a total savings of $10,000 over your child’s college career, based on qualifying education expenses of at least $4,000 each year. The Lifetime Learning Credit can reduce their taxes by a further $2,000 as long are attending school.   The government, however, does not allow double dipping.  If you pay college expenses with 529 accounts, you can not use those same college expenses to qualify for the AOC or other education tax credits.

If you will qualify for education credits based on your expected income, do not invest in a 529.  If you are lucky enough to be highly compensated and will thus not qualify, then read on.

Do you have superfluous funds that you are willing to allocate solely to education?  When you start a 529, that money is earmarked for education.  If you use it for anything else, you will pay penalties and taxes on the growth.  Of course, if your child does not attend college, you can share the 529 with another family member, or even use it yourself to further your own education.  I, for one, would prefer not to limit my investment dollars.

As I stated earlier, the 529 can be a fine way to save for college.  But without a crystal ball, I am reluctant to place limited resources in such a limiting account.  The ROTH IRA will overcome virtually all the concerns about saving for college, and will leave you maximum control over your investment dollars in the future.