Roth IRA can be tool for financing college

When it comes to saving money for college, many parents find themselves in a conundrum: They want to save for their children's education, yet they need to save for retirement.

While many financial experts advise making retirement saving the first priority, most parents still want to be able to pay at least part of their children's college costs. They often establish separate accounts: 401(k) plans for retirement and state-sponsored 529 plans for college.

But there's a third option, experts say: a Roth individual retirement account.

"The Roth IRA has a lot of appeal for retirement and can be used for college, too," says Joseph Hurley, founder and chief executive of savingforcollege.com. The Web site specializes in providing information about 529 plans and other methods.

"People should generally save for retirement first, because you can't get loans for retirement, and there are a lot of other sources of help available for college, including loans," Hurley says.

But after retirement is covered, it's time to take a closer look at 529 plans and Roths. Both plans use after-tax dollars for contributions, so you don't get an upfront tax break but your earnings grow tax-free.

Withdrawals from a 529 plan for education costs are tax-free, but so are withdrawals from a Roth if the owner is over 59 ½ and has had the account for over five years.

Even if you're younger, you can still withdraw your principal (not earnings) without penalty. "You can pull your contributions out at any time, for any purpose, without any taxes," Hurley says.

Another benefit of Roths: Many colleges don't count retirement savings when they figure out how much parents can afford to pay. That's not true of 529 plans, which are considered parental assets and usually reduce a student's financial aid.

Roth IRAs have a drawback, however. Contributions are limited to $4,000 for 2005 ($4,500 for those over 50).

The 529 plans are much more liberal, points out Walter Herlihy, president of Beacon Financial Planning in Centerville, Mass. Parents, grandparents — anyone — can contribute up to $11,000 ($22,000 for a married couple filing jointly) to each child without incurring federal gift tax.