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

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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
Kat Tretina |

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

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Investing

Ally Invest Review 2019

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

If you’re looking for an online discount broker with no minimum investment requirement, Ally Invest may be perfect for you. Ally Invest is an ideal choice not just because you don’t need a fortune to open an account, but also because commission fees for trades are well below many competitors — especially for active traders who can earn discounts.

While Ally Invest is missing some common tools for investment research and their mobile app isn’t as feature-rich as some competitors, their full-featured online platform makes up for what the mobile app lacks. And, there’s a wide range of account options with Ally Invest, so you’re covered whether you want a taxable account, a retirement account, or an account for your kids.

Ally Invest
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The Bottom Line: Ally Invest is an affordable discount broker with a wide range of investments to choose from.

  • Commissions are just $4.95 or $3.95 if you’re an active trader.
  • There’s no minimum deposit required for a self-directed trading account, and no minimum account balance requirement.
  • Ally Invest offers tons of investment options, including stocks, bonds, mutual funds, options, futures and forex.

Who should consider Ally Invest

If you’re looking for an affordable investment account, Ally Invest should be at the top of your list. You’ll have many choices for different types of accounts with Ally Invest, including traditional and Roth IRA, IRAs for the self-employed, taxable investment accounts, 529 Plan, and more. And, you won’t have to make a minimum deposit to open your account — it’s free.

Once you’ve got your account open, Ally Invest makes trading affordable for most investments. Commissions for stock trades are among the lowest of any online discount broker, and Ally Invest offers more than 100 commission-free ETFs. If you’re looking to buy Mutual funds though, you’ll pay a transaction fee, whereas some competitors offer ample fee-free options.

Ally Invest’s online trading platform is easy to use, and their research tools are good. While you won’t find earnings transcripts, SEC filings, earnings press releases or audio calls, you can still dig into technical data using free screeners and other tools powered by Recognia.

If you don’t want to manage all the investments on your own, you can opt for a managed account. This is Ally’s robo-advisor option — but you’ll need a minimum of $2,500 if you’d prefer this hands-off approach rather than a self-directed trading account.

Ally Invest fees and features

Current promotions

New Ally Invest accounts accounts receive 90 days of commission-free trades, up to $500 in value, regardless of deposit amount. Cash bonuses are available for new accounts starting at $50 for if you deposit or transfer at least $10,000.

Stock trading fees
  • $4.95 per trade
  • $3.95 per trade (30+ trades per quarter or daily balance of $100,000 or more)
Amount minimum to open account
  • $0
Tradable securities
  • Stocks
  • ETFs
  • Mutual funds
  • Bonds
  • Options
  • Futures / commodities
  • Forex
Account fees (annual, transfer, inactivity)
  • $0 annual fee
  • $50 full account transfer fee
  • $50 partial account transfer fee
  • $0 inactivity fee
Commission-free ETFs offered
Mutual funds (no transaction fee) offered
Offers automated portfolio/robo-advisor
Account types
  • Individual taxable
  • Traditional IRA
  • Roth IRA
  • 529 Plan
  • Joint taxable
  • Rollover IRA
  • Rollover Roth IRA
  • Coverdell Education Savings Account(ESA)
  • Custodial Uniform Gifts to Minors Act (UGMA)/Uniform Transfers to Minors Act (UTMA)
  • SEP IRA
  • SIMPLE IRA (Savings Incentive Match Plan for Employees)
  • Trust
Ease of use
Mobile appiOS, Android , Windows phone
Customer supportPhone, 24/7 live support, Chat, Email

Strengths of Ally Invest

Ally Invest has plenty of strengths to help it stand out from the competition, including the following:

  • Low commissions: You pay just a $4.95 commission with Ally Invest, which is one of the lowest commissions charged by discount brokers and well below the $6.95 charged by competitors including E-Trade and TD Ameritrade. Plus, if you make more than 30 trades per quarter or have a daily balance of $100,000 or more, your commission is even lower — it drops to just $3.95.
  • No minimum deposit required: While competitors such as E-Trade require a $500 minimum deposit to open an account, Ally doesn’t have any minimum initial deposit requirement. You can also earn a cash bonus for opening an Ally Invest account if you deposit or transfer just $10,000, compared with a $25,000 minimum to earn a cash bonus with E-Trade or $20,000 with Merrill Edge.
  • Powerful tools and intuitive trading platform: Ally Invest’s online site offers you powerful tools to screen investments. Its trading platform is intuitive and provides the features necessary to be an informed investor. This includes a dashboard you can customize to your preferred view, as well as real-time streaming quotes and up-to-date data.
  • Responsive online and phone customer service: You can contact Ally Invest via phone 24/7. There’s also an online chat feature, where you can get answers within seconds from helpful customer service agents. Email support is available as well.

Drawbacks of Ally Invest

Ally Invest also has some downsides to consider:

  • Mutual fund transaction fees: Ally Invest charges a $9.95 transaction fee per trade for no-load Mutual funds. But many competitors offer options without any transaction fees, including E-Trade, which offers more than 4,400 fee-free funds.
  • A mobile app with minimal features: While you can do the basics with Ally Invest’s mobile app, it offers far fewer features and investment tools than competitor apps such as TD Ameritrade Mobile.
  • No physical branches: Ally Invest is an online-only company. There are no physical branches, unlike for competitors such as Merrill Edge, or E-Trade which has more than 30 branches spread across the country.

Is Ally Invest safe?

Ally Invest is a trusted online brokerage with more than $4.7 billion in assets under management. It’s a member of the FDIC and SIPC, so you can rest assured that the cash in your accounts is safe. And since the company has passed its FINRA broker check, you can count on the fact it’s in full compliance with regulations.

Since Ally Invest is online-only, it’s important to review Ally’s data protection policies. The good news is Ally promises that they use “multiple levels of security” to keep your info safe. This includes 128-bit SSL encryption for any exchange of data from your browser and Ally’s servers if your personal information is being transmitted. The downside, however, is that Ally’s privacy policy does permit Ally to share your information with third-parties. While this is a common policy, it’s still disappointing.

Of course, once you invest your money, there’s always a risk of losses. Research what you’re investing in carefully and diversify your portfolio to minimize risks you’re taking.

Bottom line

Thanks to the fact it has no minimum deposit requirement, Ally Invest is a great choice if you’re looking to get started investing and you don’t have a ton of money. Affordable commissions and commission-free ETFs also give you a diverse offering of low-cost or no-cost investment options. But if you’d prefer to buy Mutual funds without paying transaction fees or want a physical branch to visit, alternatives such as E-Trade or Merrill Edge may be a better choice to meet your needs.

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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

Ally Invest Managed Portfolios Review 2019

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Ally Invest Managed Portfolios is a robo-advisor option from a trusted online-only financial institution.

It can make managing your money simple: Just answer a few basic questions about your goals and risk tolerance and your funds are invested for you. However, while fees are competitive, they aren’t the lowest among other robo-advisors’ offerings.

If you don’t mind the lack of bonus for opening the account, and you want to take a hands-off approach to building wealth, Ally Invest may be a good option.

Ally Invest Managed Portfolios
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The Bottom Line: Ally Invest Managed Portfolios is a decent robo-advisor that’s competitive with other managed portfolios online. But its lack of tax-loss harvesting, and fees that slightly exceed competitors may prompt you to look elsewhere if you’re not already an Ally customer.

  • The minimum deposit to invest in Ally Invest Managed Portfolios is $100
  • 0.00% management fee, no matter how high your account balance
  • Customer service is available 24/7, but there are no local branches to visit

Who should consider Ally Invest Managed Portfolios?

If you’re looking for a robo-advisor that allows you to build a diversified portfolio without a lot of advanced knowledge about investing, Ally Invest Managed Portfolios has you covered.

You’ll answer a few questions about your age; timeline for investing and risk tolerance; and whether you’re investing for retirement, wealth-building or a big purchase. Then, Ally Invest comes back with a recommended portfolio you can accept or tweak.

You can open a joint, custodial or Individual taxable account with Ally Invest Managed Portfolios, or can opt for a Traditional IRA, Roth IRA or Rollover IRA. Unfortunately, unlike with Ally Invest’s self-directed accounts, there’s no promotion or bonus for transferring funds into a managed portfolio. And, you’ll need quite a bit of money to get started — more than many competitors in the robo-advisor industry require.

Still, if you don’t mind the lack of brick-and-mortar locations and marginally higher fees, Ally Invest is a worthy competitor to consider when looking for help managing your money.

Ally Invest Managed Portfolios fees and features

Amount minimum to open account
  • $100
Management fees
  • 0.00%
Account fees (annual, transfer, inactivity)
  • $0 annual fee
  • $50 full account transfer fee
  • $50 partial account transfer fee
  • $0 inactivity fee
Current promotions

None currently

Account types
  • Individual taxable
  • Traditional IRA
  • Roth IRA
  • 529 Plan
  • Joint taxable
  • Rollover IRA
  • Rollover Roth IRA
  • Coverdell Education Savings Account (ESA)
  • Custodial Uniform Gifts to Minors Act (UGMA)/Uniform Transfers to Minors Act (UTMA)
  • SEP IRA
  • SIMPLE IRA (Savings Incentive Match Plan for Employees)
  • Trust
Portfolio
  • Ally managed portfolios cover 3 asset classes and 9 major market segments
Automatic rebalancing
Tax loss harvesting
Offers fractional shares
Ease of use
Mobile appiOS, Android, Windows Phone
Customer supportPhone, 24/7 live support, Chat, Email

Strengths of Ally Invest Managed Portfolios

Ally Invest Managed Portfolios has some significant advantages worth considering:

  • Investing in a diversified portfolio is easy. You’ll answer basic questions about your investment goals and Ally Invest will suggest a portfolio with an appropriate mix of U.S. and foreign bonds, international and U.S. stocks, and cash. You can also tweak the suggestions Ally Invest Managed Portfolios makes, so you take on more or less risk based on your comfort level.
  • Ally requires a low minimum deposit of just $100 to open a managed portfolio account. While some of Ally’s competitors (such as Betterment) don’t have a minimum deposit requirement at all, $100 still falls on the very low side of the scale and makes this account extremely accessible to new investors.
  • Ally Invest Managed Portfolios offers automatic portfolio rebalancing. This helps to ensure you remain invested in the right mix of assets if certain investments under- or over-perform.
  • Customer service. Ally Invest offers phone, Email, and chat support. Customer service agents are available 24/7 with little or no wait. Agents will do their best to provide answers, although it may take a little time if your questions are technical since you may need to be transferred to an investment advisor.

Drawbacks of Ally Invest Managed Portfolios

You’ll also want to consider the potential downsides of choosing Ally Invest Managed Portfolios.

  • Ally Invest Managed Portfolios charges fees that are slightly higher than several competitors. You’ll pay .30% for Ally’s robo-advisor service, compared with .25% for Betterment’s digital account or for Wealthfront.
  • Ally Invest Managed Portfolios currently does not offer tax loss harvesting, which involves selling investments at a loss to offset taxable gains (although they do offer tax advantaged portfolios which add municipal bonds to Ally’s core portfolios). Competitors such as Betterment do offer this feature. However, Ally representatives indicate tax loss harvesting is expected to be rolled out in 2019 and investors with managed portfolios will be able to transition their accounts into a portfolio with tax loss harvesting.
  • No physical branches. If you’d prefer to go into a branch for local customer support, you’ll need to look elsewhere, such as E-Trade, which has more than 30 branches across the country.
  • Mobile apps aren’t very advanced. While Ally Invest allows you to use mobile apps on iPhone and Android phones to access basic account information, the offered apps aren’t as feature-rich as competitors such as Betterment.

Is Ally Invest Managed Portfolios safe?

Whenever you invest your money, there’s a risk you may lose some or all of it. This is no different with Ally Invest Managed Portfolios. The assets your robo-advisor invests you in could decline in value and your portfolio could lose money.

But Ally Invest is as safe as any trusted online brokerage, and there’s little risk of losing assets if the investment firm goes bankrupt. Ally Invest is in compliance with regulatory requirements according to FINRA’s Broker Check tool. Ally Invest is also a member of the FDIC and SIPC, both of which ensure cash in bank and brokerage accounts respectively.

Final thoughts

Ally Invest Managed Portfolios is a viable choice for investors looking for an easy, hands-off way to invest — especially with its low $100 minimum deposit requirement. Ally also promises to offer a broad range of socially-responsible portfolios, which should interest investors who want to consider more than just financial returns. But the lack of a promotional offer, higher management fees, and the fact tax loss harvesting isn’t currently offered makes Ally a less-than-ideal option for investors looking for the most affordable way to build a diversified portfolio. If you want a lower-cost option that does offer tax-loss harvesting, consider robo-advisors such as Betterment or Wealthfront.

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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