A Roth IRA can be used to pay for college expenses, and it is possible to do so without incurring taxes or penalties. However, there are disadvantages of using a Roth IRA for college, and it’s important to weigh the pros and cons.
A Roth IRA is designed to help individuals save for retirement. While you can also use a Roth IRA for college expenses, you’ll want to understand the potential ramifications.
Here’s what you need to know about using a Roth IRA for college, plus other college savings options, to help make the best decision for your situation.
Can You Use a Roth IRA for College?
You can use a Roth IRA to help pay for college. However, as mentioned, a Roth IRA is primarily a vehicle for saving for retirement. You contribute after-tax dollars to the account (meaning you pay taxes on the contributions in the year you make them), and the money in the Roth IRA grows tax-free. You can generally withdraw the funds tax-free starting at age 59 ½. However, if you withdraw the money early, you may be subject to a 10% penalty.
But there are some ways to make early withdrawals from your Roth IRA to help pay for college without being penalized. Because you contribute to a Roth IRA with after-tax dollars, you can withdraw the contributions (but not the earnings) you’ve made to a Roth at any time without paying a penalty. You could then use those contributions to help pay for college.
Just be aware that there are annual contribution limits to a Roth IRA. In tax year 2023, you can contribute up to $6,500 (or $7,500 if you’re 50 or older), and in 2024 you can contribute up to $7,000 ($8,000 for those 50 or older). How much you’ve contributed will affect how much you have in contributions to withdraw, of course.
Another way to use a Roth IRA to pay for college without being penalized is by taking advantage of one of the Roth IRA exceptions that allow you to withdraw money from your account early. One of the exceptions is for qualified higher education expenses.
💡 Quick Tip: Did you know that you must choose the investments in your IRA? Once you open a new IRA and start saving, you get to decide which mutual funds, ETFs, or other investments you want — it’s totally up to you.
Do You Have To Pay Penalties if You Use a Roth IRA for College?
Typically, if you take out money from your Roth IRA before age 59 ½ , you will be subject to taxes and penalties. However, IRA withdrawal rules grant a few exceptions to this rule, and one of the exceptions is for qualified higher education expenses.
If you pay qualifying higher education expenses to a qualified higher education institution for your child, yourself, your spouse, or your grandchildren, you won’t have to pay the 10% penalty for withdrawing funds from a Roth IRA. Qualified higher education expenses include things like tuition, fees, books and supplies. However, you will still have to pay taxes on any earnings you withdraw from your Roth IRA.
Pros and Cons of Using a Roth IRA for College
Whether using a Roth IRA for college is right for you depends on your particular situation. Here are the pros and cons you’ll want to consider.
Pros of Tapping Into a Roth IRA for College
Advantages of using a Roth IRA for college expenses include:
• You might not have to borrow as much money to pay for college. Using a Roth IRA for college expenses may reduce the need for student loans. And for some students, using money from a Roth IRA might make the difference between being able to afford to attend college or not.
• You won’t be penalized for withdrawing the money. Because of the exception for qualified higher education expenses, you can take out the money to pay for those expenses without having to pay the 10% penalty.
• If you withdraw just your contributions, you won’t owe taxes on that money.
Cons of Tapping Into a Roth IRA for College
These are the drawbacks of using a Roth IRA to pay for college:
• Your retirement savings will take a hit. This is the biggest disadvantage of using the money in a Roth IRA for college. While there are other ways to help cover the cost of college, there are generally fewer options to help you save for retirement if you spend your Roth IRA funds on college expenses.
• Because of possible compounding returns, even a few thousand dollars withdrawn from your Roth IRA today might mean missing out on tens of thousands of dollars of potential growth by the time you’re ready to retire years from now.
• Eligibility for financial aid could be affected. Another possible downside of using a Roth IRA for college is that the money you withdraw generally counts as income on the FAFSA (Federal Application for Federal Student Aid). That may limit financial aid you could receive, including grants and loans.
Roth IRA vs 529 for College
Before you decide to use a Roth IRA for college savings, you might want to consider a 529 plan. With a 529, you can save money for your child to go to college and withdraw the funds tax-free as long as they’re used for qualified higher education expenses.
A 529 plan has more generous contribution limits than a Roth IRA does, and other extended family members may also contribute to the plan. In addition, while 529 contributions aren’t deductible at the federal level, many states provide tax benefits for 529s.
💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.
Which College Expenses Can a Roth IRA Be Used For?
According to the IRS, a Roth IRA can be used to pay for qualified higher education expenses. These qualified expenses include tuition, fees, books and supplies, and equipment required for enrollment or attendance.
The Takeaway
It’s possible to use a Roth IRA to help pay for qualified higher education expenses, and you typically won’t be subject to a penalty for doing so. However, taking funds out of your Roth IRA means you won’t have that money available for retirement. You’ll also lose out on any gains that may have compounded throughout the years. That could impact your retirement savings or even delay your retirement date.
Instead of using a Roth IRA for college, you may want to consider other ways to save for college that might better fit your financial needs, such as a 529 plan. That way you can save for both college and retirement.
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FAQ
Can you use a Roth IRA for college?
Yes, it is possible to use a Roth IRA for college expenses. If you withdraw money from a Roth IRA for qualified higher education expenses, you generally will not be subject to the 10% early withdrawal penalty. Tuition, fees, books, supplies, and equipment needed for enrollment or attendance are usually considered qualified expenses.
Is a Roth IRA better than a 529 for college?
Deciding whether to use a 529 plan or a Roth IRA for college will depend on your specific financial situation. In many cases, a 529 plan may make more sense than a Roth IRA for college savings. You can generally contribute more to a 529 plan each year than you can to a Roth IRA, there are tax advantages to the plan, and other relatives can also contribute to it. Plus, by using a 529, you won’t be taking money from your retirement savings.
Can I withdraw from my IRA for college tuition without penalty?
Yes, you can use a Roth IRA to pay for college tuition without penalty in most cases because tuition is generally considered a qualified higher education expense. However, to avoid taking money from your retirement savings, you may want to consider other college saving options instead, such as a 529 plan.
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