When you need money to pay for college expenses, tapping your Roth IRA is one option you might consider. While a Roth IRA is designed to help you save for retirement on a tax-advantaged basis, it’s possible to use money in your account to fund college costs for yourself, your spouse or your children. Before pulling money from your Roth IRA for college tuition or other education expenses, get to know the pros and cons. Consider working with a financial advisor as you prepare financing for college.
Using a Roth IRA for College: What Are the Rules?
The IRS has some rules in place governing Roth IRA withdrawals and it’s important to know how those apply to distributions made for college expenses.
First, you should know that you can withdraw your original contributions to a Roth IRA at any time, without triggering a tax penalty. Qualified distributions are also 100% tax- and penalty-free. A qualified distribution includes:
- Distributions taken at age 59 1/2 or older
- Withdrawals made after your Roth IRA has been open for at least five years and you’re at least 59 1/2 years old
- Withdrawals made because you become totally and permanently disabled
- Withdrawals made to your beneficiary after you pass away
- Distributions up to $10,000 taken for the purchase of a first home
If you take money from a Roth IRA before age 59 1/2 and it’s considered a non-qualified distribution, the IRS can apply a 10% early withdrawal penalty. There are, however, some exceptions that allow you to get around the penalty. One of those exceptions extends to using Roth IRA distributions to pay for qualified higher education expenses.
Specifically, you can claim an exception and avoid the early withdrawal penalty if a distribution is not more than the qualified higher education expenses. For IRS purposes, qualified higher education expenses include:
- Tuition and enrollment fees
- Student activity fees
- Books, supplies and equipment
- Room and board for students enrolled at least half-time
- Education expenses required for a special needs student
Also, note that these expenses must be paid to an eligible educational institution. In simple terms, that means any college or university that’s eligible to participate in federal student aid programs is also eligible for these qualified higher education expenses. Receiving student loans or grants isn’t a condition for using Roth IRA money to pay for college.
Pros of Using a Roth IRA to Pay for College
One of the main advantages of using a Roth to cover college costs is the tax-free nature of withdrawals, says Dennis Pellegrini, a chartered financial consultant at Peak Brokerage in Wyomissing, Pa. Being able to withdraw your original contributions or account earnings without a tax penalty may be a more attractive option than taking out student loans, which would have to be repaid with interest.
The tax-free status of a Roth IRA also means that new contributions to the plan continue to grow, even if you’re using some of it for college. You’ll pay no tax on earnings as long as you’re making qualified withdrawals from your account. Since there are no required minimum distributions for a Roth IRA, you could continue growing your savings with new contributions as long as you have earned income to report on your taxes.
Cons of Using a Roth to Pay for College
The biggest downside of using your Roth IRA – or any retirement plan for that matter – to pay for college is that you’re draining money from your retirement nest egg.
“Most investors don’t have an over-funded retirement plan and should avoid withdrawals from their Roth,” Pellegrini says. “Remember what the flight attendant says before you fly: If the oxygen mask falls down, place the mask over your head before you assist the person next to you.”
While you may want to help your child avoid the burden of student loan debt, there are no loan programs for retirement. If you get to retirement age without sufficient savings in place, you may be forced to work longer, take Social Security benefits early at a reduced rate or drastically cut your standard of living to make your household budget work.
Additionally, Roth IRA withdrawals, though they may not be taxed when used for education expenses, still have to be reported on your taxes. Amounts withdrawn can affect financial aid eligibility, potentially shrinking the amount of aid you or your student is able to qualify for.
Alternatives to Using Your Roth IRA
A 529 savings plan is a tax-advantaged vehicle that’s designed just for education savings. This includes elementary, high school and college expenses. Every state offers at least one plan and some offer more than one. Compared to using a Roth IRA for college, 529 savings plans have some key advantages, including:
- High lifetime contribution limits
- Higher annual contribution limits
- Earnings that grow tax-deferred
- Withdrawals that are tax-free when used for education purposes
- Accounts that can be transferred to another beneficiary with no penalty
Additionally, there are no income restrictions on who can contribute to a 529 savings plan. That’s the difference from a Roth IRA. You might be considering a Roth IRA as a college savings tool, but it’s possible that you may not be eligible to contribute, based on your income.
For 2023, you can’t contribute to a Roth IRA if you’re married and file taxes jointly or a qualified widow and your modified adjusted gross income is equal to or greater than $228,000 ($240,000 in 2024). For single filers, heads of household and married couples filing separately who don’t live with one another, contributions phase out for 2023 at $153,000 ($161,000 in 2024). Married couples who file separately but live together are subject to a $10,000 income limit for Roth contributions.
Anyone can contribute to a 529 plan, regardless of income or the state where you live. Generally, you can make annual contributions to the plan on behalf of each child you have, up to the gift tax exclusion limit. For 2023, this amount is $17,000 ($18,000 in 2024); that doubles for married couples filing jointly ($34,000 in 2023 and $36,000 in 2024). That’s well over the $6,500 annual limit ($7,000 in 2024) allowed for Roth IRA contributions.
There’s one more advantage that a 529 plan can offer: the ability to front-load contributions. This rule allows you to make five years’ worth of contributions at once, with no penalty. For example, you could conceivably add up to $150,000 to your child’s 529 plan at one time if you’re a married couple filing a joint tax return. The catch is that you can’t make any new contributions to the plan for five years.
The only negative of a 529 savings plan is if your child doesn’t attend an elementary or high school that charges tuition or doesn’t go to college. The money in the 529 account becomes fully taxable income and is subject to a 10% penalty fee if you choose to use it for other expenses.
Bottom Line
Using your Roth IRA for college expenses might be tempting. However, it’s wise to consider any potential tax impacts and how they affect your retirement strategy for the long term. Saving in a 529 plan, or even a Coverdell Education Savings Account, can still yield tax advantages without requiring you to shortchange your retirement goals.
Tips for College Planning
- Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Don’t forget: if you use a 529, you don’t have to use the program offered by your state. you can find the one that works best for you.
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