Using a ROTH IRA to Cover Educational Expenses

Image provided by

Image provided by

While a ROTH IRA is a popular retirement saving tool, there are many advantages to using a ROTH IRA for education.

Provided by Angel McCall CFP®


Most people think of a ROTH IRA as a method for saving for retirement, but it can also be used to cover college tuition. When people explore their options for saving for the children’s education, often times a 529 is a popular way to go. However, there are a lot of advantages to using a ROTH IRA to save for college, which should be considered as you make the decision on how you plan to save.

Like a 529, a ROTH IRA’s funds can be used to pay for books, tuition, and other qualified education expenses. Even though ROTH IRAs are traditionally used for retirement, funds for education for yourself, a spouse, your children, or grandchildren, can be withdrawn without penalty. ROTH IRAs are more flexible than a 529. If your child decides that college is not for them, or if they get a scholarship, a ROTH IRA allows you to convert funds to retirement income, without penalties or tax consequences. A 529 becomes taxable when you remove funds for non-educational purposes. On top of that, there is a 10% penalty for not using the funds for education.

If a child goes to college and wants to take advantage of financial aid, they must file a Free Application for Federal Student Aid (FAFSA). This application includes many financial questions to determine the level of aid the child will receive. Included in this information are the assets of the parent and the child, and this includes money saved using a 529. This could reduce the amount of financial aid a child can qualify for. ROTH IRAs are not included as assets, and there is no cap to the total amount saved. You can save a significant amount of money with a ROTH IRA and still qualify for financial aid.

While a ROTH IRA is a great option to consider when saving for college, there are a few considerations to take into account. People with high incomes are prohibited from contributing to ROTH IRAs. In order to contribute to a ROTH IRA, your income must be below $114,000 for a single income, and $181,000 for a couple’s income. A ROTH IRA must be established for at least 5 years before the first penalty-free withdrawal. There is a cap on how much you can contribute to your ROTH IRA - $5500/year until turning 50, when that raises to $6500/year. However, in spite of this, a ROTH IRA is still an option worth considering when making plans to save for education.

When considering using a Roth IRA to fund college expenses, it is absolutely necessary to review your entire financial picture so as not to jeopardize your own retirement.

Download a pdf of this article here