A Roth individual retirement account (IRA) helps you save for retirement by offering tax-free accumulation and withdrawal of earnings. It may also be used for non-retirement financial goals, such as funding college for a loved one. But should a Roth IRA be used to help pay for college expenses? This is a question faced by many parents and grandparents as the price tag for higher education keeps rising. Show
Learn the pros and cons of paying for college out of your Roth IRA. Key Takeaways
How To Use a Roth IRA for College ExpensesA Roth IRA is a tax-advantaged retirement account that anyone with an earned income (up to a certain threshold) can contribute to. However, when you withdraw money from a Roth, you can use those withdrawals to pay for any expenses. This includes college expenses for a child or other beneficiary. There is no penalty for using these funds for college expenses. NoteYou should have a solid financial foundation in place and a plan to save for retirement before getting started with any savings plans for college. Remember: While it is possible to borrow money for college, it is not wise to rely on debt to fund your retirement. How much you can withdraw from your IRA to pay for college expenses depends on how old you are. That is because the money in your Roth IRA falls into one of two categories:
You can withdraw contributions from your IRA at any point without paying any taxes or penalties. In most cases, if you withdraw the earnings before you reach age 59 1/2, you will have to pay a 10% early withdrawal penalty. You'll also need to pay tax on the earnings. If you use those early withdrawals for qualified education expenses, you won't have to pay the penalty. However, you will have to pay income tax. Both contributions and earnings from a Roth IRA can be used to pay for college. If you are under age 59 1/2, you should only withdraw your contributions to avoid paying income tax on early withdrawals of earnings. Pros and Cons of Using a Roth IRA for CollegeThere are both pros and cons to using a Roth IRA to help pay for college. Pros
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Pros Explained
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Using a Roth IRA vs. Using a 529 PlanA 529 plan is a dedicated savings plan for education expenses. It is more common to use for that purpose than a Roth IRA.
A 529 is a dedicated education savings plan. It is structured to allow you to save larger amounts for students than a Roth IRA is. NoteA 529 plan is also called a Qualified Tuition Program, or QTP. Annual contributions are set by the state or the organization administering the 529 plan. Annual contributions over $16,000 in 2022 may be subject to the federal gift tax. This allows for much larger contributions per year than a Roth IRA. That means you can reach greater savings, earn more interest, and have more money available when your student heads to college. A 529 plan also has different tax advantages than a Roth IRA. But it also has less flexibility. Withdrawals from a 529 must be used for qualified education expenses if you want to avoid paying a penalty. If your contributions and earnings end up being more than the beneficiary needs for their education, you'll have to pay tax on the difference. Using a Roth IRA to pay for college allows for more flexibility. But using it could cut into your retirement savings. This could leave you without enough income after you stop working. Which Is Right For You?For families who are on track to meet their retirement goals, it often makes more sense to open 529 plans first for college savings. But using a Roth IRA can add extra flexibility to your savings. Which option is right for you will depend on your financial situation. It also depends on what other retirement savings accounts you have available. If you are unsure which type of savings plan you should use, talk to a financial planner. Frequently Asked Questions (FAQs)Is there a limit on how many times you can withdraw money from your Roth IRA for college tuition?There is no limit on how many times you can withdraw funds to pay college tuition. However, although there is no penalty for using the funds for qualified educational expenses, you may still owe tax on the earnings you withdraw if you've had your Roth IRA for less than five years and you're younger than 59 1/2. Do your funds have to be in your Roth IRA for five years to use them for college tuition?No. You can withdraw your funds to pay qualified education expenses such as tuition no matter how long you've had your account. But if you're under 59 1/2 years old and you can wait five years, you'll be able to use those funds tax-free. What are qualified educational expenses?A qualified higher education expense is any money paid by an individual for expenses required to attend a college, university, or other post-secondary institution. QHEEs include tuition, books, fees, and supplies such as laptops and computers, but expenses like insurance and health fees are not eligible.
What expenses can you use a Roth IRA for?You use the withdrawal (up to a $10,000 lifetime maximum) to pay for a first-time home purchase. You use the withdrawal to pay for qualified education expenses. You use the withdrawal for qualified expenses related to a birth or adoption.
Can you use a Roth IRA for education?While they're not specifically designed for college savings, Roth IRAs can be used to pay for a college education. Roth IRA accounts are funded with after-tax dollars and grow tax-free, and money can be withdrawn for educational purposes without a penalty — though you'll still have to pay income taxes.
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