Roth IRA – Education expenses can be paid with Roth IRA without penalties
Many parents find it difficult to know how to save for their children’s college expenses while saving for retirement. Roth IRAs are very flexible investment vehicles, making them a good option for parents who juggle saving for college and retirement.
As always, there are some rules to follow when using your Roth IRA to pay for college expenses, so make sure you understand the rules before making a withdrawal.
Roth contributions can be withdrawn at any time and for any reason. This makes Roths not only a great vehicle to save for retirement, but also to save for college expenses. While I recommend that parents put their retirement goals ahead of college savings goals, it’s good to know that you can withdraw your contributions to use for college expenses, without worrying about paying taxes or penalties.
If you need more money than you’ve put into your Roth account, you still have options. Typically, distributions taken from a Roth before he turns 59½ are subject to tax and a 10% penalty (on earnings only). However, there is an exception for withdrawals that are made to pay for college expenses.
The early withdrawal penalty does not apply if you use the funds to pay for qualified higher education expenses for yourself, your spouse, or your dependent children. Qualified higher education expenses include tuition, room and board, fees, books, supplies, and equipment. Unfortunately, withdrawals made to pay off student loans don’t qualify (wish!).
The ability to use your Roth account to pay for college expenses is a great benefit. However, withdrawals from the Roth could affect your eligibility for financial aid. The good news is that Roth IRAs are not counted as an asset to either the student or the parent in the financial aid formula. The bad news is that withdrawals from the Roth IRA count as income in the financial aid formula. So you’ll need to weigh the pros and cons before you dip into your retirement accounts for education expenses.
Also, if you make Roth withdrawals to pay for education expenses, it could disqualify you from other education tax incentives, such as the Hope or Lifetime Learning credit.
Note that while the early withdrawal penalty does not apply to withdrawals that are used for educational expenses, you will still need to pay taxes on earnings withdrawn before you turn 59½. This is true regardless of how long the account has been open.
Simply put, Roths are very flexible investment vehicles, making them a great tool for saving for retirement and other financial goals, like education expenses. However, there are rules to follow, and just because you can withdraw from your Roth IRA to pay for education expenses doesn’t mean it’s the best option for you. You should consult with a tax professional before making any withdrawals to determine if that is the best strategy for you.
