How to Use a Roth IRA to Pay for College

There are several ways to pay for college, including by relying on scholarships and grants, by taking out student loans, […]

There are several ways to pay for college, including by relying on scholarships and grants, by taking out student loans, or with a 529 savings plan. However, families often have untapped money in another type of financial account that they want to know if it could be used as a way to pay for college. An IRA account, or more specifically a Roth IRA, is money that is earmarked for retirement, but many wonder if it can be used for other life expenses as well.

What is a Roth IRA?

A Roth IRA (Individual Retirement Account) is a type of retirement savings account that is available to individuals that have earned income at some point in their lives (which is most adults). This type of IRA account is named after Senator William V. Roth Jr. who sponsored the US legislation that created it.

Roth vs Traditional IRAs

A Roth IRA is not the only type of IRA account available.

A traditional IRA account is another popular and often-used type of retirement savings account. The main difference between a Roth IRA and a traditional IRA is the way they are taxed. Contributions to a traditional IRA are tax-deductible, and the money in the account grows with its taxes deferred. This means that withdrawals from a traditional IRA are taxed as income in the year they are taken.

On the other hand, contributions to a Roth IRA are made with after-tax dollars, which means that you cannot deduct your contributions to this type of account on your yearly tax returns. However, while the money in a Roth IRA grows tax-free, withdrawals from the account aren’t tax-free unless the account has been open for at least five years and the account holder is over age 59 1/2.

This tax-free growth is the biggest reason as to why a Roth IRA may make sense to be used to pay for higher education expenses.

How to Use a Roth IRA to Pay for College

First, let’s get something straight: a Roth IRA (or any IRA) is not the same as a 529 savings account. However, under certain circumstances, it may make sense for a family to tap into their retirement funds to help pay for their son’s or daughter’s college.

The best way to use a Roth IRA to pay for college expenses is to withdraw the contributions (this is the money you invested… not any earnings that have grown over time) from the IRA without penalty. The IRS allows penalty-free withdrawals of contributions from a Roth IRA at any time, for any reason.

Any earnings, however, can only be pulled out of the account penalty free if you are over the age of 59 1/2. If you withdraw the earnings from the account before reaching that age, you’ll be subject to a 10% early withdrawal penalty, as well as any taxes you may owe on the earnings.

Once again, you can only withdraw any original contributions you’ve made to the Roth IRA and not any investment growth or interest. It should go without saying, but any money you withdraw from your Roth IRA will cause you to lose the opportunity for that money to continue to grow tax-free over time.

Any money you withdraw from a Roth IRA can be used for any purpose, unlike a 529 account, which can only be used for specific qualified expenses.

It’s important to weigh the pros and cons of using a Roth IRA to pay for college expenses or any other reason. It’s always a good idea to consult a financial advisor before making any decisions or withdrawals from your retirement accounts.

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