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529 Plans vs. Roth IRA: Which is best for college savings?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

If you have children, you want to give them the very best. Often, that includes an excellent college education. However, helping your child pay for school has gotten much more expensive in recent years. In fact, the cost of attending a public, four-year college has gone up 25% in just ten years, according to data from The College Board.
If you want to contribute to your child’s education, it’s best to start saving when they’re young. Thankfully, there are several savings vehicles you can use to save for college, including 529 plans and Roth IRAs. Below, find out how these savings vehicles work and how to decide which one is best for you.

529 vs Roth IRA: How they compare

529 plans are offered either by your state or by an individual school. They are accounts created specifically for saving for education expenses. A 529 plan is an investment account, so you contribute money and choose investments; over time, the account grows with annual returns.

Roth IRAs are mainly for retirement savings. You contribute with post-tax dollars, so when it comes time to withdraw your money, you don’t have to pay taxes again. However, some people opt to use Roth IRAs for education savings, too.

But which is best for you? 529 plans and Roth IRAs differ in several key ways.

1. Tax benefits and penalties

According to Lloyd Sacks, a Certified Financial Planner and managing director of the private client group at Sacks & Associates, contributing to a 529 plan has some benefits when it comes to your taxes.

“Some states allow a deduction for contributions made to in-state 529 plans,” he said.

That deduction can help reduce your taxable income, potentially leading to a smaller tax bill.

Roth IRAs don’t offer the same benefit. However, withdrawals from Roth IRAs contributions are free from income taxes.

2. Withdrawal rules for education

If you withdraw earnings from a Roth IRA before your retirement, you typically are subject to early withdrawal penalties. However, there is an exception in some circumstances.

“If [the money is] used for qualified higher education expenses, the 10% early withdrawal penalty on earnings is waived, but you are still responsible for taxes on the earnings in this case,” Sacks said.

529 plan withdrawals can only be used for education expenses, or you will be subject to penalties and taxes. You’ll pay the full income tax on the withdrawal, plus a 10% penalty fee.

3. Investment options

With a Roth IRA, you have several different investment options. You can invest in individual securities, such as stocks, bonds, certificates of deposit, exchange-traded funds, or mutual funds.

529 plans have fewer options. Depending on which state you open your 529 in, you may only have access to a small range of investment options, such as index funds. You aren’t limited to opening a 529 in your home state so it pays to shop around for the best investments options and lowest fees.

4. Contribution limits

Roth IRAs and 529 plans have very different contribution limits. If you want to save aggressively, a 529 plan allows you to sock away more money than a Roth IRA.

“For 2019, the annual contribution limit to a Roth IRA is set at $6,000 with a $1,000 catch-up contribution for those over age 50,” said Sacks. “Total 529 plan contribution limits are set by each individual state. For 2019, a single taxpayer can contribute up to $15,000 in a single year to the plan [with a 529 plan].”

5. Financial aid

What savings vehicle you choose can impact the financial aid package your child is eligible to receive. The Free Application for Federal Student Aid (FAFSA) looks at your savings differently depending on the type of account you use.

“Retirement accounts, like a Roth IRA, are not considered assets on the FAFSA, and will not impact a student’s ability to receive financial aid for college,” said Sacks.

Because Roth IRA accounts are exempt from the FAFSA, your Roth IRA balance won’t affect what financial aid your child is eligible to receive. A 529 plan balance, on the other hand, can affect your FAFSA.

“A 529 plan will impact a student’s ability to receive financial assistance towards college expenses,” said Sacks.

However, that doesn’t mean that one is better than the other. With a 529 plan, there are tax advantages to making contributions, which can be an effective tradeoff against FAFSA implications.

6. Plan B: What if you don’t use it for college?

When it comes to planning for college, it can be hard to predict where your child will be at the age of 18. If your child decides not to go to college, that can affect your finances.

With a 529 plan, you’re subject to a 10% penalty if you don’t use the money for qualified education expenses for the selected beneficiary, which can eat up a big chunk of your savings. If your child does decide not to go to school, you can switch the beneficiary to another child, another relative, or yourself. You can also use the funds to pay for trade school or even K-12 education.

A Roth IRA doesn’t carry the same penalties. If your child decides against going to school, you can keep the money in your savings for your retirement, penalty-free.

You should consider a Roth IRA for college savings if:

  • Your retirement savings are low. If you don’t have substantial savings for retirement yet, a Roth IRA can do double duty; you can save for retirement while simultaneously saving for college. If your child doesn’t go to college, you can use the funds you saved for your retirement.
  • If you’re not sure your child will go to college. Because the Roth IRA offers greater flexibility, it’s a better option if you’re not certain your child will go on to a university.

You should consider a 529 plan for college savings if:

  • You need to save aggressively. If there are only a few years left until college, or you think your child will opt for a more expensive private school, contributing to a 529 plan with higher contribution limits makes more sense than a Roth IRA.
  • You aren’t eligible for a Roth IRA. If you’re ineligible for a Roth because your income is too high, a 529 plan makes sense.
  • Your state offers a tax deduction. Some states offer tax benefits if you contribute to a 529 plan, making them a smarter option.

Saving for college

Saving for college can be overwhelming, especially when it comes to deciding on the best savings plan for you. If you’re torn between a Roth IRA and a 529 plan, the Roth IRA offers greater flexibility.

“Unless the clients fall into the high net-worth category or are fairly affluent, I usually recommend saving and investing in a Roth IRA if they are eligible to contribute to one,” said Sacks. “By utilizing the Roth IRA, a client is able to save for college expenses while also funding their own personal retirement in the event they fall short of their savings goals through other means; the funds within a Roth IRA can be used for either purpose.”

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Kat Tretina
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Kat Tretina is a writer at MagnifyMoney. You can email Kat here

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Investing

thinkorswim Review 2019

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Thinkorswim is a free trading platform available to TD Ameritrade customers. You’ll need a TD Ameritrade account to use it and it’s one of several trading platforms available to investors, including a simpler web-based platform as well as a mobile platform that works on iOS and Android.

TD Ameritrade describes thinkorswim as a “professional-level trading platform for serious traders,” and it lives up to this promise. In fact, it’s one of the most feature-rich platforms offered, and only a few others, such as TradeStation, come close to comparing.

But while you’ll get all the premium features you can imagine — including real-time data streaming, more than 400 technical studies, advanced charting tools and much more — the commissions you pay will be higher than many competitors, which increases costs if you make frequent trades.

thinkorswim
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The Bottom Line: Thinkorswim is a trading platform with everything a professional trader needs.

  • All TD Ameritrade customers can use thinkorswim for free.
  • Investors can use thinkorswim to trade a wide variety of assets including equities, ETFs, options, futures, forex, and options on futures.
  • You can trade select securities 24 hours a day, 5 days a week, except holidays.

Who should consider thinkorswim?

If you’re already a TD Ameritrade customer, consider using thinkorswim if you’re an active trader or if you want to test out investing strategies without putting real money at risk.

If you don’t currently have an account with TD Ameritrade, it may be worth opening one to get access to this powerful trading platform, along with its paperMoney program, which allows you to test out trading strategies and monitor progress without putting real money at risk. Since there’s no minimum deposit required to open an account with TD Ameritrade — and all account holders can access thinkorswim for free — you have little to lose by giving the platform a try.

But while thinkorswim offers the data you need in an intuitive and easy-to-use app, you’ll pay higher trading commissions with TD Ameritrade than with similar competitors who have equally powerful platforms, such as TradeStation and Zacks Trade. If you’re a frequent trader and want to make regular trades to implement the strategies powerful trading platforms help you develop, you may pay more for the privilege with thinkorswim.

thinkorswim fees and features

Current promotions

Trade commission-free for 60 days + get up to $600

Option trading fees
  • $6.95 / trade + $0.75 / contract
Stock trading fees
  • $6.95 per trade
Account minimum
  • $0
Tradable securities
  • Options
  • Stocks
  • ETFs
  • Mutual funds
  • Bonds
  • Futures / commodities
  • Forex
Account fees (annual, transfer, inactivity)
  • $0 annual fee
  • $75 full account transfer fee
  • $0 partial account transfer fee
  • $0 inactivity fee
Commission-free ETFs offered
Mutual funds (no transaction fee) offered
Account types
  • Individual taxable
  • Traditional IRA
  • Roth IRA
  • 529 Plan
  • Joint taxable
  • Rollover IRA
  • Coverdell Education Savings Account(ESA)
  • Custodial Uniform Gifts to Minors Act (UGMA)/Uniform Transfers to Minors Act (UTMA)
  • Custodial IRA
  • SEP IRA
  • Solo 401(k) (for small businesses)
  • SIMPLE IRA (Savings Incentive Match Plan for Employees)
  • Trust
  • Guardianship or Conservatorship
Ease of use
Mobile appiOS, Android
Customer supportPhone, 24/7 live support, Chat, Email, 364 branch locations
Research resources
  • Mutual fund reports

Strengths of thinkorswim

Some of the big advantages of using thinkorswim include:

  • Professional level-trading tools and access to endless data. Thinkorswim provides access to advanced charting tools including visuals, Fibonacci tools, and a choice of 20 drawings. You can also use thinkorswim to analyze more than 400,000 economic data points and economic indicators across six continents; can build your own algorithms using thinkScript; and can access options statistics including the Sizzle Index, which allows you to compare current option volume with the five-day average volume.
  • Easy navigation and in-app support. You can quickly find the information you’re looking for with a dedicated in-platform search engine. And if you run into trouble when using the trading platform, the in-app chat allows you to text live with a trading specialist and even share your screen to get immediate assistance.
  • PaperMoney allows you to test out trading strategies and track the performance of your investments. This stock market simulator is a great one for beginning traders and for investors who are more risk averse and who want to see real-world results before putting funds at risk.
  • 24/5 trading of a wide range of investments. You don’t have to limit your trading only to standard market hours.

Drawbacks of thinkorswim

Potential downsides of thinkorswim include:

  • High TD Ameritrade commissions. You’ll pay $6.95 for all equity trades, regardless of trading volume. Competitors with similar advanced trading tools charge less. TradeStation charges just $5 per trade for equity trades, for example. TD Ameritrade also charges $6.95 / trade + $0.75 / contract for options contracts, compared with TradeStation which charges $5 plus $0.50 per contract.
  • A steep learning curve. Mastering thinkorswim can be difficult for beginning investors who aren’t familiar with professional-level trading tools. There’s a learning center, but it may take time to watch demos and read the thinkorswim training manual to learn how to navigate the platform.

Is thinkorswim safe?

Investing is never risk-free. When buying Stocks, ETFs, Options or other investments, you assume the risk of losing money if the investments you buy perform poorly.

But with thinkorswim, you don’t have to worry about losing money because of your broker’s business practices. Thinkorswim is offered by TD Ameritrade, which has $1.3 trillion in assets under management and is a well-respected and established brokerage firm.

TD Ameritrade is a member of the FDIC and SIPC, so cash deposited in your account is federally insured. And the company’s FINRA broker page attests to the fact the broker is in full compliance with regulatory requirements.

TD Ameritrade also aims to deliver the highest security in the industry, and even promises to reimburse you for cash or shares lost from your account due to unauthorized activity that occurs through no fault of your own.

Final thoughts

If you want a full-featured trading platform that provides round-the-clock trading, automatic orders and all the data you could ever need, thinkorswim is a great choice. But if you’d prefer to get similar professional-level trading tools without paying TD Ameritrade’s high commissions for trades, consider looking to competitors such as TradeStation or Zacks Trade instead.

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Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Christy Rakoczy
Christy Rakoczy |

Christy Rakoczy is a writer at MagnifyMoney. You can email Christy here

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Investing

Folio Investing Review 2019

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Folio Investing was one of the first companies to head into online brokering, according to the company. While others were still working with paper, Folio propelled investors to the internet.

Compared to the competition, their flat-fee pricing is enticing to users who might not be well-versed in the online brokerage realm. Their management tools are easy to understand, but don’t come looking for a one-stop shop for your investing. Features are sparse when it comes to in-depth analysis, which might make you look elsewhere for your investing needs.

Folio Investing
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The bottom line: If you’re new to the do-it-yourself world of investing, Folio’s simple management tools are approachable.

  • No account minimums.
  • Flat-fee pricing is charged every month or quarter, depending on the plan.
  • Unlimited personal and retirement accounts.

Who should consider Folio Investing?

As one of the first companies to introduce online investing as an option, Folio has a long history in internet years. The company launched in 2000, though some may be scared off by the company’s relatively young age when compared to more established competitors.

If you’re new to the world of online investing, Folio is a great opportunity for you to learn the basics and grow your knowledge. If you’re only investing in a few different Stocks, you need help, and Folio guides you in the right direction.

Folio Investing fees and features

Account minimum
  • $0
Account fees (annual, transfer, inactivity)
  • $0 annual fee
  • $100 full account transfer fee
  • $5 fee per security transfer and cash transfer fee ($25 min / $75 max) for partial account transfer
  • $0 inactivity fee
Current promotions

Folio Investing offers a free 60 day trial when you open a new Folio Unlimited Account.

Account types
  • Individual taxable
  • Traditional IRA
  • Roth IRA
  • Joint taxable
  • Rollover IRA
  • Rollover Roth IRA
  • Custodial Uniform Gifts to Minors Act (UGMA)/Uniform Transfers to Minors Act (UTMA)
  • Custodial IRA
  • SEP IRA
  • SIMPLE IRA (Savings Incentive Match Plan for Employees)
  • Trust
Automatic rebalancing
Tax loss harvesting
Tax loss harvesting detailFolio offers 10 automated tax strategies that ensures every trade you make in your account will be based on your chosen strategy.
Offers fractional shares
Ease of use
Customer supportPhone, Email

Strengths of Folio Investing

Flat fee: Other brokerages charge a percentage of your investments. Folio charges one flat rate of $29 every month on the unlimited plan. If you’re on the basic plan, it’s $15 every quarter.

While there are charges for other services, such as an IRA Custodial fee, you’re only charged for something that isn’t covered in the flat fee.

No minimum balance: For newer investors who might not have a ton of cash saved up, this is a great gateway into Folio. Other online brokers may require a minimum balance, which can be a turnoff if you know the value of investing but don’t have as much as you need for a specific company.

Unlimited accounts: Whether you’re into individual, retirement or business accounts, you can choose as many as you’d like. You can also add your joint and Trust accounts here.

Tax Football: This is Folio’s patented investment tool that’s the company’s version of tax-loss harvesting. You can sell certain investments that aren’t getting you the results you want and minimize your tax loss.

Drawbacks of Folio Investing

Limited investment types: Folio Investing only offers Stocks, ETFs and Mutual funds options. You don’t have access to things like penny Stocks, Futures / commodities or other types of investments. This is probably fine for beginner investors, but for anyone who is looking for other types of investments, you won’t get that here.

No college accounts: While Folio’s accounts list is long — even including business options! — there are some that are noticeably missing. The lack of a 529 Plan or other educational savings account might be a turnoff if you’re looking for ways to invest in a child’s education.

No apps: If you like the idea of accessing your investments wherever you are, you may have trouble doing that with Folio. There are no phone or tablet apps for on-the-go access.

Is Folio Investing safe?

Folio accounts are FDIC- and SIPC-insured, which protects the securities in your account. This is a good baseline if you’re unsure what happens to your money in case the firm folds.

While all forms of investing carries some amount of risk, Folio doesn’t assure users that their money is protected should there be a data leak or another security breach. Some other online investment companies clearly state the lengths they go to in order to secure your information and money.

Final thoughts

If you’re looking for a simple investing setup with one flat rate, Folio is a great option for your investment needs. It’s an easy tool that allows you to set up as many accounts as you’d like with no account minimum. It’s enticing for a reason: It’s not complicated and takes little effort. This is valuable for newbie investors or those who don’t have a lot of experience hand-picking their investment choices.

But Folio is limited in some areas, such as only offering Stocks, Mutual funds and ETFs. The lack of other securities is a turnoff to hardcore traders. While there are a good amount of ways that investors can make sure their portfolios are giving them the most amount of return, it might not be enough for more advanced investors. If you’re hoping for more in-depth features, like deeper insights or analysis tools, you might want to look elsewhere.

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Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Dori Zinn
Dori Zinn |

Dori Zinn is a writer at MagnifyMoney. You can email Dori here

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