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Level 1

Using a Qualified Plan Account to Fund a IRA, Roth or 529?

Using a Qualified Plan Account to Fund a IRA, Roth or 529?  We are over 59 1/2.  My wife receives a Pension from OPM every month.  We don't really need this money right now so we were going to use it to fund a 529 to pay for my daughters college costs.  However, it appears this still bumps up our taxes with about 38% of the distribution going to taxes.

Would it be better to fund a new IRA for the next 6 years and take withdrawals out of the IRA for college?  

It appears the Roth IRA and the 529 would not save us this initial 38% hit in taxes.

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Accepted Solutions
Level 11

Using a Qualified Plan Account to Fund a IRA, Roth or 529?

If your goal is tax-free growth and tax-free distributions for college expenses, then the 529 Plan is the way to go.  You are allowed larger contributions and very liberal qualifying distributions for education expenses.

However, if you are seeking reduced taxes now, the only real option you may have to lower your taxes is to reduce other taxable income you receive.  Unless your pension plan allows for a rollover, then you may be able to place the funds into another tax-deferred account and have more control and tax planning for your distributions.

If you have earned income (wages) then contributing to a Traditional IRA may lower your taxable income.  Funding a Roth will not reduced your taxable income.  Funding a 529 Plan may lower your state taxable income as some states provide deductions for contributions.  There is not a federal deduction for 529 Plan contributions.  

Other options to reduce taxable income:  tax-free bonds and tax-deferred annuities.

See this TurboTax article Information on 529 Plans for additional details about 529 Plans.

1 Reply
Level 11

Using a Qualified Plan Account to Fund a IRA, Roth or 529?

If your goal is tax-free growth and tax-free distributions for college expenses, then the 529 Plan is the way to go.  You are allowed larger contributions and very liberal qualifying distributions for education expenses.

However, if you are seeking reduced taxes now, the only real option you may have to lower your taxes is to reduce other taxable income you receive.  Unless your pension plan allows for a rollover, then you may be able to place the funds into another tax-deferred account and have more control and tax planning for your distributions.

If you have earned income (wages) then contributing to a Traditional IRA may lower your taxable income.  Funding a Roth will not reduced your taxable income.  Funding a 529 Plan may lower your state taxable income as some states provide deductions for contributions.  There is not a federal deduction for 529 Plan contributions.  

Other options to reduce taxable income:  tax-free bonds and tax-deferred annuities.

See this TurboTax article Information on 529 Plans for additional details about 529 Plans.