Roth IRA: A Great Way to Save for College
If you're saving for college, I bet you haven't tucked any money away in a Roth IRA. And that's a shame because a Roth IRA is a great savings vehicle for college. 
I sunk money into Roth IRAs for my son and daughter and I'm happy that I did. You can save money and taxes by saving through a Roth IRA account, as well as boosting your chances for financial aid.
Here are eight things you need to know about using a Roth IRA to pay for college:
1. Not every child qualifies for a Roth.
Children can't own a Roth IRA unless they're earning a salary. Consequently, parents usually won't be able to establish a Roth for their children until they are teenagers. There are exceptions: a friend of mine in Los Angeles opened a Roth IRA for her son, who was in middle school, after he earned money from a movie appearance.2. Roth IRAS impose contribution limits.
The maximum yearly contribution that anyone under 50 can stuff into a Roth is $5,000, but you can't contribute more than what you've earned in a year. If a teenager earns $2,250 from working as a lifeguard this year, that's the maximum she could contribute to a Roth for 2011.3. Parents can contribute to the Roth.
I can't imagine teenagers eagerly contributing to a Roth so it's a good things that parents and grandparents - or anybody else - can kick in money to a teenager's Roth.4. A Roth can be cheaper.
One of the drawbacks of some 529 college savings plans is that they are expensive since there is an extra layer of bureaucracy due to states acting as middlemen for their own programs.
With a Roth, you can set up an account at just about any financial institution and select the investments you want. I've invested in index funds for my children's Roth accounts.
5. You can withdraw the Roth contributions tax free to pay for college.
It's best to leave the earnings (as opposed to the contributions) inside the account because they would be subject to taxes and a 10% early withdrawal penalty.6. A Roth IRA isn't counted as a financial aid asset.
The Free Application for Federal Student Aid doesn't even ask about a teenager's retirement accounts or the parents' retirement accounts either.7. Beware of the Roth's one financial aid drawback.
While the financial aid methodology won't penalize a teenager for Roth assets, once that money is withdrawn to pay for college, schools will care. The withdrawals are considered student income which can impact a financial aid award. You can avoid this as an issue by waiting until you complete your final financial aid application during the later part of your child's junior year in college.8. Leave some money in your child's Roth.
If there is any money left in the Roth when your child graduates from college, your young college grad will start their careers with a ready-made nest egg. I left about $4,000 in the Roth of my daughter, who will be graduating in May. I told her that if she set ups monthly automatic contributions into her Roth, she will boost her chances of a very comfortable retirement.
Lynn O'Shaughnessy is author of The College Solution and she also writes a college blog for CBSMoneyWatch.
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