AUGUSTA — In the June 1 Maine Sunday Telegram, an out-of-state financial adviser suggested that Mainers would do better to save for college by investing in a Roth IRA instead of a Section 529 college savings plan (“Maine Voices: Roth: A better college-savings plan?”). The commentary was unbalanced and overlooked a number of important benefits unique to 529s, especially with respect to Maine’s NextGen College Investing Plan® (NextGen).

Both Roth IRAs and 529 college savings accounts offer opportunities for families to save tax-free for future plans, but there are important differences between them to consider. Keep in mind that Roth IRAs are designed for retirement savings, whereas 529 accounts are designed to encourage savings for future higher-education expenses.

NextGen is Maine’s college savings plan and is administered by the Finance Authority of Maine. It is the sixth-largest college savings plan in the nation, with more than $7.9 billion in assets under management as of May 30. I am proud of NextGen and the numerous benefits it provides to both Maine and out-of-state families saving for college.


There are four key points to be made about the benefits of saving for college through a 529 plan:

 529 plan fees have declined dramatically in recent years. Individuals often can invest in direct-sold 529 plans using institutional share classes that have lower expenses than the same investments would have outside of a 529.

Even in adviser-sold plans, fees are typically about the same as if you purchased the same investments outside of the 529 plan. And FAME rebates the administration fee for NextGen accounts owned by or for the benefit of state residents. The net result is to further reduce overall costs. Additionally, some 529 plans, including NextGen, offer investment options with no annual asset-based expenses.

 529s offer flexibility. Although the earnings portion of non-qualified 529 withdrawals is subject to ordinary income tax, the plans offer exceptions to the 10 percent penalty; for example, if a student receives a scholarship or attends a U.S. military academy. 529s also allow account holders to change beneficiaries to other family members at any time.

 529s offer many investment options. 529 plans today typically offer dozens of investment options, comprising equity, fixed-income and other investments ranging from risk-averse to more aggressive strategies, and offer passive and actively managed mutual funds, exchange-traded funds and stable value options.

 Roth IRAs are designed primarily as retirement and not as college-savings vehicles. While Roth IRAs are good vehicles for retirement, they may not offer the best of both worlds.

If you are already using an IRA (Roth or traditional) for your retirement, then using a Roth IRA for college savings may not be a good option for you.

That’s because the Roth $5,500 annual contribution limit (if you are age 50 or under in 2014) would likely not cover the funds you’ll need for both retirement and college savings, especially if you are saving for more than one child. If you use a Roth IRA for education, you could be shortchanging your own retirement.


FAME is also proud of its partnership with the Harold Alfond College Challenge. We all should be grateful for the late Harold Alfond’s remarkably generous vision to make a grant of $500 for every Maine baby.

The Alfond Scholarship Foundation considered a number of options to deploy this remarkable gift, and ultimately chose to partner with NextGen for a variety of good reasons, including a paramount goal of encouraging Mainers to aspire to and save for higher education.

Consider a single parent with a modest or unsteady income who may not be able to maximize a Roth IRA, as suggested in last week’s piece. A Maine parent can open a NextGen account and add their own money alongside the Alfond grant. If not Alfond-eligible, a Maine parent may be eligible for a $200 grant from FAME. FAME also offers additional matching grants for contributions to eligible accounts: up to $100 match per year and $1,000 lifetime.

Every family’s financial needs and goals differ, so it is important for you to decide on your savings goals before choosing a path. As with all investments, please remember that participation in a 529 plan involves investment risks, including the possible loss of principal. The important thing is to start planning for your child’s future college expenses now and consider the benefits of a 529 account as a vehicle for realizing your goal.

— Special to the Telegram

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