What You Should Know Before Using a Roth IRA to Pay for College

What You Should Know Before Using a Roth IRA to Pay for College

The Benefits and Drawbacks of a Roth IRA for College Funding A Roth individual retirement account (IRA) allows you to save for retirement by allowing you to earn and withdraw money tax-free. It can also be used to fund non-retirement financial goals, such as paying for a loved one's college education. Should a Roth IRA, on the other hand, be used to help pay for college? Many parents and grandparents are asking themselves this question as higher education costs continue to rise. Learn about the benefits and drawbacks of using your Roth IRA to pay for college.

Important Takeaways

  • Roth IRAs are intended to be used to save for retirement.
  • You can take money out of a Roth IRA at any time to pay for college without incurring fees.
  • Although Roth IRAs have lower contribution limits, they offer more savings flexibility.
  • You'll have less money for retirement if you use your retirement savings to pay for college.

How to Put Money Into a Roth IRA for College

A Roth IRA is a tax-advantaged retirement account to which anyone with earned income (up to a certain limit) can contribute. When you take money out of a Roth, on the other hand, you can use it to pay for anything. College costs for a child or other beneficiaries are included. Using these funds for college expenses is not subject to any restrictions. Important: Before starting any college savings plans, make sure you have a solid financial foundation in place and a plan to save for retirement. Remember that while borrowing money for college is an option, relying on debt to fund your retirement is not a good idea. The amount you can withdraw from your IRA to pay for college is determined by your age. This is due to the fact that the money in your Roth IRA is divided into two categories: Contributions: They are the funds you put into your IRA. Earnings: The amount of money you made from your contributions in the form of interest. You can take money out of your IRA at any time without incurring any taxes or penalties. You will usually have to pay a 10% early withdrawal penalty if you withdraw your earnings before you reach the age of 59 1/2. On top of that, you'll have to pay taxes on your earnings. If you use your early withdrawals for qualified educational expenses, you won't have to pay the penalty. You will, however, be required to pay income tax. A Roth IRA can be used to pay for college with both contributions and earnings. You should only withdraw your contributions if you are under the age of 59 1/2 to avoid paying income tax on early withdrawals of earnings.

The Benefits and Drawbacks of Using a Roth IRA for College

Using a Roth IRA to help pay for college has advantages and disadvantages.


  • Flexibility
  • Contributions and earnings accrue without being taxed.
  • More investment possibilities
  • Contributions are tax-free and can be withdrawn at any time.
  • Withdraw earnings without penalty if you withdraw them early.


  • Income restrictions
  • Contribution limits that are lower
  • Financial assistance is reduced.
  • There is no deduction for state taxes.
  • Can deplete retirement funds
  • Early withdrawal penalties

Explained Advantages

Flexibility: There is no single beneficiary for a Roth IRA. That means they can be used to help pay for the expenses of multiple students, not just one. You can still put money aside for retirement if you don't need it for college. Tax-free growth: When you earn income, you pay taxes on the money you put into an IRA. You will not have to pay any additional taxes when you withdraw it. More investment options: The majority of 529 college savings plans only offer a small number of investment options. Stocks, bonds, mutual funds, ETFs, REITs, CDs, and other investments are available through Roth IRAs. It may open up more opportunities for more aggressive investments that will help you grow your business. Roth IRA contributions are made after-tax dollars, allowing for tax-free withdrawals. This means that they can be withdrawn at any time without incurring any tax or penalty. Earnings can be withdrawn tax-free after age 59 1/2. If you have had your account open for at least five years, it is valid. Withdrawals without penalty: If you take money out of your account early for qualified educational expenses, you won't have to pay the 10% penalty. However, you will still be required to pay income tax.

The Drawbacks are Expounded

If married couples filing jointly earn more than a certain amount, Roth IRA income restrictions apply, making it impossible for them to make direct contributions to these accounts.. In 2021, this amount will be $208,000 (increasing to $214,000 in 2022). Single filers earning less than $140,000 ($144,000 in 2022) must contribute to a Roth IRA in 2021. Roth IRAs have lower contribution limits than those in other college savings accounts. You can invest up to $6,000 per year if you are under the age of 50 or $7,000 if you are over the age of 50. Reduces financial aid: Distributions from Roth IRAs for college expenses are counted as untaxed income on the FAFSA for the following year. This may reduce your child's need-based financial aid eligibility. For financial aid purposes, Roth IRAs are still considered low-impact assets because the total asset value is not reported on the FAFSA. Contributions to a Roth IRA do not qualify for a state income tax deduction, unlike some state 529 plans. Affects retirement savings: If you put money aside for retirement to pay for college instead, you won't be able to fund your retirement. Early withdrawal taxes: If you withdraw money for college expenses before you reach the age of 59 1/2, you will have to pay income tax on it. You cannot withdraw funds until your account has been open for five years, even if you are of legal age.

Investing in a Roth IRA vs. a 529 Plan

A 529 plan is set-aside savings account for educational costs. It is more commonly used than a Roth IRA for this purpose.
Roth IRA 529 Plan
There is no deduction for state income taxes. At the state level, there are tax advantages.
Contributions and earnings accrue without being taxed. Contributions are tax-deductible.
Young people with low income can open plans that qualify for a lower tax bracket. There are no income or age restrictions.
Earnings withdrawn before the age of 59 1/2 are taxed but not penalized (if used for qualified education expenses) To prevent penalties, withdrawals must be used for qualified education expenses.
Contributions can be taken out tax-free at any time, but earnings are taxed if taken out too soon. There are no taxes on contributions or earnings withdrawn for qualified educational expenses.
There are numerous investment options available. Investment options are limited.
Withdrawals can be made for as many people as you want. Each plan has only one beneficiary (can switch beneficiaries)
A maximum contribution of $6,000 (or $7,000 if you're 50 or older) is allowed. To avoid gift tax, contributions must be less than $15,000 per year (increasing to $16,000 in 2022).
Uses funds that could have been saved and compounded for retirement. To front-load, the plan, grandparents or other relatives can make a one-time contribution of $75,000 to the plan.
A 529 plan is a special type of education savings account. It's designed to allow you to save more money for college than a Roth IRA.

A Qualified Tuition Program, or QTP, is another name for a 529 plan

The state or the organization in charge of administering the 529 plan determines the annual contributions. The federal gift tax may apply to contributions of more than $15,000 per year. In 2022, the limit will be raised to $16,000. In comparison to a Roth IRA, this allows for much larger annual contributions. As a result, you'll be able to save more money, earn more interest, and have more money available when your student starts college. A 529 plan differs from a Roth IRA in terms of tax benefits. It does, however, have less flexibility. If you want to avoid paying the penalty, you must use withdrawals from a 529 for qualified education expenses. You'll have to pay tax on the difference if your contributions and earnings exceed what the beneficiary requires for their education. When it comes to paying for college, a Roth IRA gives you more options. However, using it could deplete your retirement funds. It could leave you with insufficient funds once you stop working.

Which Is The Best Option For You?

It often makes sense for families on track to meet their retirement goals to open 529 plans first for college savings. However, a Roth IRA can give you more options when it comes to saving. Your financial situation will determine which option is best for you. It also depends on whether you have any other retirement savings accounts. Consult a financial planner if you're unsure which type of savings plan to use.

Most Commonly Asked Questions (FAQs)

Is there a limit to how often you can take money out of a Roth IRA to pay for college?

To pay for college tuition, you can withdraw money as often as you want. Although there is no penalty for using the funds for qualified educational expenses, if you've had your Roth IRA for less than five years and are under the age of 59 1/2, you may still owe tax on the earnings you withdraw.

Do you have to keep your money in your Roth IRA for five years before you can use it for college?

No. Regardless of how long you've had your account, you can use your funds to pay for qualified education expenses like tuition. However, if you are under the age of 59 1/2 and can wait five years, you will be able to use those funds tax-free.  

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