Our Finance Guide
  • Home
  • Loans
  • Tax
  • Credit Cards
  • Investing
No Result
View All Result
  • Home
  • Loans
  • Tax
  • Credit Cards
  • Investing
No Result
View All Result
Our Finance Guide
No Result
View All Result
Home Uncategorized

How To Use A Roth IRA To Save For College

admin by admin
March 22, 2022
in Uncategorized
0

Related articles

Top 5 Best Ethereum Wallets for 2022

The Best Investment Strategy For This Market

  • Death of the IRA owner
  • Becoming permanently disabled
  • A qualified first-time home purchase
  • Higher education expenses
  • Health insurance premiums after being unemployed
  • Un-reimbursed medical expenses over a certain percentage of your income
  • An IRS levy
  • A qualified reservist distribution
  • In case of a qualified emergency or disaster
  • Up to $5,000 for a qualified birth or adoption distribution

If you make a withdrawal of earnings from your Roth IRA account in one of these categories, you won’t pay a 10% penalty (but you will still pay taxes on the amount of your earnings).

Since we’re talking about using a Roth IRA to save for college, let’s specifically look at the higher education expenses.

As an example, let’s say that you have made $25,000 in contributions to your Roth IRA and the balance has now grown to $35,000. If you want to withdraw the entire amount to pay for qualified higher education expenses, then you will pay no tax or penalty on your $25,000 in contributions. Because higher education is an allowed reason to withdraw earnings before retirement, you will not pay a penalty but you will pay taxes on the $10,000 in earnings.

How Roth IRA Withdrawals Impact Your FAFSA

The FAFSA is the Free Application For Student Aid. It’s used to determine a student’s eligibility for student aid.

While a Roth IRA does provide great advantages when paying for education, there are a few things you’ll want to keep in mind to further maximize its benefits.

Withdrawals from a Roth IRA can impact your FAFSA, reducing the amount of financial aid you might receive.

Rick Wilder, the director of student financial affairs at the University of Florida, mentions ”Students who apply for need-based financial aid are required to report income and asset information on the FAFSA.”

Retirement accounts aren’t counted as assets on the FAFSA (so you don’t have to report the balance of your Roth IRA). However, withdrawals from a retirement account, such as a Roth IRA, are counted against the FAFSA.

A little planning ahead and possibly even speaking with an accountant can help to get the most out of the FAFSA and your Roth IRA for educational expenses.

Drawbacks To Using A Roth IRA For College Savings

While a Roth IRA can be an option to consider when saving for college, there are a few drawbacks to using a Roth IRA for college savings. These drawbacks vary depending on whether you are withdrawing money from the student’s IRA or from a parent’s IRA.

Using A Student’s Roth IRA

There are two big drawbacks to using a student’s Roth IRA.

First, it’s really hard to get money into a child’s Roth IRA. There are a lot of rules about earned income, and when children are young, it’s hard to fund a Roth IRA (or fund it fully). As children start working when they are teenagers, it’s easier, but even then, the amount you can contribute is likely low.

Second, when you use the money out of the account, it counts fully as income for the child. So, you might get a benefit for a student going into their freshman year of college, but when filling out the FAFSA for their second year of school, they’re going to have to fully report any amount withdrawn the previous year as income.

Using A Parent’s Roth IRA

Beyond the FAFSA implications, the big drawback to using a Roth IRA for college tuition is that you’re withdrawing from a retirement account “mid life”. Since you are limited on how much you can contribute, do you think you’ll make up the loss over time? It’s tough to say.

For example, let’s say you start saving the max at $6,000 per year right now and continue for 18 years. Maybe that’s grown to $150,000 in total. That’s awesome. But, if you start pulling out $25,000 per year for 4 years, you’re now back down to $50,000.

Don’t get me wrong, $50,000 for a 22 year old is awesome – but what is the lost opportunity cost of that extra $100,000?

Over 40 years, that $100,000 could have grown into $2,172,000 – tax free. And that’s with no additional contributions! If you take that original IRA, continue adding in $5,500 per year, you get $4,682,000 at age 62!

If you start with the left over $50,000 and contribute $6,000 per year – you now only grow to $2,500,000. Not a bad return, but you end up losing 50% of your value potentially.

That’s the big drawback. Pulling money out of a tax sheltered account like a Roth IRA “mid life” or “early life” really hinders future returns on that money. And that would be tax free money.

Alternative Ways To Save For College

Rather than using a Roth IRA to save for college, many people will be better off using a 529 plan or a Coverdell Education Savings account. These two types of accounts are similar yet have a few key differences:

  • 529 plans have no contribution limit (except the gift tax exclusion), however, Coverdell accounts have a contribution limit of $2,000 per beneficiary
  • Generally you have a wider array of investment options with a Coverdell account
  • Many states offer tax credits or tax deductions for contributing to a 529 plan
  • Coverdell accounts have a wider list of what counts as an educational expense
  • Coverdell accounts also have limits on contributor income and beneficiary age

In both cases, you can use tax-free distributions to pay for qualified educational expenses. Consider one of these types of accounts instead of using a Roth IRA for college savings.

Final Thoughts

A lot of people want to use a Roth IRA to save for college because they think “what if my child doesn’t go to college – that money could be wasted”. And while that’s a concern, there are still ways to access funds in accounts like a 529 plan or Coverdell.

While you can use a Roth IRA to save for college, the drawbacks are bigger than the rewards in our opinion.

The first is that you may have to pay taxes on any earnings that you withdraw. It may also affect your FAFSA and the amount of financial aid that your student may be eligible for. But the biggest drawback is how it can negatively impact your own retirement savings.

Remember that you can always get financial help to pay for college, but there isn’t financial aid to pay for your retirement!

Rather than using your Roth IRA, most people will be better off using a 529 plan or a Coverdell Education Savings account to pay for college.

Would use consider using Roth IRA funds for high education expenses? Why or why not?

[Read More…]

admin

admin

Related Posts

Top 5 Best Ethereum Wallets for 2022

Ethereum is one of the most widely-used blockchains available today. Thousands of crypto projects are built on the Ethereum network, with hundreds of billions of dollars...

The Best Investment Strategy For This Market

A reader asks:I’m 50-years-old and just started investing for the first time in February of this year. Was promptly kicked in the private parts as a...

14 Major Employers That Offer Part-Time Jobs With Great Benefits

Think you need to work long hours to qualify for company-backed retirement plans, tuition reimbursements and affordable health insurance?Actually, you don’t have to have to be...

How to Get 8 More Free At-Home COVID Tests From the Government

If you already got your first two rounds of free at-home COVID tests from the federal government, you can now order eight more free tests for...

The 5 Ws (and 1 H) of asking for your first raise

Asking for a pay raise can be intimidating, especially if you’re doing it for the first time. As someone who is freshly making their way in...

Next Post

6 safe investments for first-time investors (or anyone risk-averse)

24 Household Uses for Vinegar That Will Save You Money

Dear Penny: Can I Get Sued for a Car Loan I Co-Signed 22 Years Ago?

No Result
View All Result

Subscribe Us

By clicking submit, I authorize Our Finance Guide and its affiliated companies to: (1) use, sell, and share my information for marketing purposes, including cross-context behavioral advertising, as described in ourTerms of Service and Privacy Policy, (2) supplement the information that I provide with additional information lawfully obtained from other sources, like demographic data from public sources, interests inferred from web page views, or other data relevant to what might interest me, like past purchase or location data, (3) contact me or enable others to contact me by email with offers for goods and services from any category at the email address provided, and (4) retain my information while I am engaging with marketing messages that I receive and for a reasonable amount of time thereafter. I understand I can opt out at any time through an email that I receive, or by clicking here.

RECOMMENDED

Will student loan forgiveness ever happen? What we know so far
Loans

Will student loan forgiveness ever happen? What we know so far

Biden team insists taxes won’t go up for most people
Tax

Biden team insists taxes won’t go up for most people

CATEGORIES

  • Credit Cards
  • Investing
  • Loans
  • Tax
  • Uncategorized

Subscribe Us

By clicking submit, I authorize Our Finance Guide and its affiliated companies to: (1) use, sell, and share my information for marketing purposes, including cross-context behavioral advertising, as described in ourTerms of Service and Privacy Policy, (2) supplement the information that I provide with additional information lawfully obtained from other sources, like demographic data from public sources, interests inferred from web page views, or other data relevant to what might interest me, like past purchase or location data, (3) contact me or enable others to contact me by email with offers for goods and services from any category at the email address provided, and (4) retain my information while I am engaging with marketing messages that I receive and for a reasonable amount of time thereafter. I understand I can opt out at any time through an email that I receive, or by clicking here.

© 2025 Our Finance Guide, All Rights Reserved.

  • Contact Us
  • Privacy Policy
  • Terms Of Service
  • Unsubscribe
  • Privacy Choices
No Result
View All Result
  • Home
  • Loans
  • Tax
  • Credit Cards
  • Investing

© 2025 Our Finance Guide, All Rights Reserved.

Skip to content
Open toolbar Accessibility Tools

Accessibility Tools

  • Increase TextIncrease Text
  • Decrease TextDecrease Text
  • GrayscaleGrayscale
  • High ContrastHigh Contrast
  • Negative ContrastNegative Contrast
  • Light BackgroundLight Background
  • Links UnderlineLinks Underline
  • Readable FontReadable Font
  • Reset Reset