How and When to Use a Roth IRA for College

How And When To Use A Roth IRA For College

Roth IRAs are known as excellent retirement savings accounts, but did you know they can also serve as a college savings option for your kids? Although a typical 529 plan is usually a better place to save for college, you may want to consider a Roth IRA in certain circumstances.


Advantages of a Roth IRA for College Savings

  • You can take out your contributions from a Roth IRA at any time. This makes them a good reservoir of funds for those college bills.
  • Earnings, aka “growth”, on the account is tax-free, just like a 529 Plan. Just be careful—withdrawing earnings will have tax consequences if you’re less than 59.5 years old.
  • If you don’t use the money for college, it can help fund your retirement. This “dual-purpose” account is invaluable for many families.


What to Watch Out for With a Roth IRA

  • Don’t threaten your retirement by taking money out for college. If you are not on track for retirement savings, dipping into a Roth to fund college puts you further behind on the critical retirement goal. Don’t lose sight of retirement needs!
  • Handle the FAFSA carefully. The FAFSA won’t count the money in your Roth as assets for the financial aid need calculation—that’s good! But, once you take money out of the Roth to pay for school, it will show up in the FAFSA income calculation. That can significantly increase what the FAFSA expects your family to pay.


Is a Roth IRA Right for Your Family?

  • Higher income families can’t use a Roth as easily. A married couple with $199,000 in modified adjusted gross income (on your tax return) is excluded from using a Roth. There are “backdoor” strategies around this, but in general, high income families won’t be able to make use of the Roth IRA for education savings.
  • Unsure if your child will attend college? Then you’re a good candidate. If your child doesn’t end up needing college savings, or as much as you have saved, your Roth can effortlessly be used for retirement needs instead.
  • 529 Plans are still more flexible for college. Because there are no taxes due on a 529 Plan for college expenses, they are superior to Roth IRAs for many families. Are you pretty sure your child will need money for college? Make use of the 529 Plan option.


Need help sorting through your Roth IRA options and how to pay for college? Schedule a time to talk!


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