Q. Between 529, Roth IRA, a brokerage account, or custodial account, which is best?
A. Simple answer: 529 Plan also know as Qualified Tuition Plan. It's the best tax advantages. One drawback is that there can be a 10% penalty on earnings if the child decides not to go to college or trade school. But the penalty can be avoided by naming another family member as beneficiary. If the kid goes to school on scholarship, and doesn't need the 529 money, the penalty (but not the tax) is waived.
There is no federal deduction for making a contribution to a 529 plan. Most states, including IL, allow a deduction on the state return.
Q. Which one will provide the greatest return on investment?
A. Although a 529 plan does give as many options as brokerage account, most of them have enough flexibility to give near the same returns as brokerage accounts.
As child must have earned income to open an IRA. When used for education, the 10% penalty is waived, but tax is still due if the withdrawal is before age 59.5.
