Many people assume that a 529 plan is the ideal college savings tool, but other vehicles can help parents save for college expenses, too. Take the Roth IRA, for example. Whether you should use one or the other (or both) depends on several factors, including how much you intend to contribute and how you’ll use the earnings.

A 529 plan allows participants to make substantial nondeductible contributions—up to hundreds of thousands of dollars, depending on the plan and state limits. The funds grow tax-free, and there’s no tax on withdrawals, provided they’re used for “qualified higher education expenses” such as tuition, fees, books, computers, and room and board. If you use the funds for other purposes, you’ll generally be subject to income taxes and a 10 percent penalty on the earnings portion. Some 529 plans are also eligible for state tax breaks.

Roth IRA contributions also are nondeductible and grow tax-free. And you can withdraw those contributions anytime, tax- and penalty-free, for any purpose. Qualified distributions of earnings—generally, after age 59½ and more than five years after your first contribution—are also tax- and penalty-free.

The main advantages of 529 plans are generous contribution limits and the ability to accept contributions from relatives or friends. Roth IRAs, on the other hand, are subject to annual contribution limits of currently $6,000 ($7,000 if you’re 50 or older). So, even if you and your spouse each set up Roth IRAs when your child is born, the most you’ll be able to contribute over 18 years is $216,000. Another drawback is that you must have earned income at least equal to the contribution, and you can’t contribute to a Roth IRA if your adjusted gross income exceeds certain limits.

Funds in a 529 plan that aren’t used for qualified education expenses will eventually trigger taxes and penalties when they’re withdrawn. However, with a Roth IRA, you can use contributions, as well as qualified distributions of earnings, for any purpose without triggering taxes or penalties. This includes items that wouldn’t be qualified expenses under a 529 plan, such as a car or off-campus housing expenses that exceed the college’s room and board allowance. Plus, if you don’t need all your Roth IRA funds for college expenses, you can leave them in the account indefinitely.

Before selecting a plan, consider your overall financial, retirement and estate planning goals. Our firm can help.

The COVID-19 pandemic has provided many lessons for business owners. One is how to report the impact of a disaster on a company’s financial statements. Under U.S. Generally Accepted Accounting Principles (GAAP), disasters such as this year’s crisis are referred to as “subsequent events,” of which there are two types:

These events provide additional evidence about conditions, such as bankruptcy or pending litigation, that existed at the balance sheet date. The effects of these events generally need to be recorded directly in the financial statements.

These provide evidence about conditions, such as a natural disaster, that didn’t exist at the balance sheet date. Rather, they arose after that date but before the financial statements were issued (or available to be issued). Such events should be disclosed in the footnotes to prevent the financial statements from being misleading. Disclosures should include the nature of the event and an estimate of its financial effect (or disclosure that such an estimate can’t be made).

So, for example, the World Health Organization didn’t declare the COVID-19 outbreak a public health emergency until Jan. 30, 2020. However, events that caused the outbreak had occurred before the end of 2019. So, the risk was present in China on Dec. 31, 2019. Accordingly, calendar-year entities may have needed to recognize the effects in their financial statements for 2019 and, if applicable, the first quarter of 2020. Contact our firm for help with your financial statements.