Written by Michael Feder
Reviewed by听Bronson Ledbetter, MBA,听Vice President, Student Services and Financial Operations
When it comes to a college savings plan, many options are available. Grants and scholarships are typically the first sources of financial aid that college students seek to cover education expenses. After that, federal student loans, tuition assistance programs and other private financing options are other options to pay college expenses often worth exploring.
However, there is another possible source of funding for college-bound beneficiaries 鈥 a Roth IRA. This option is viable, but there are a few rules and guidelines you should first be aware of.
This article is not intended to serve as financial advice. All financial decisions, including investments, should be made carefully and potentially with the guidance of a financial planning professional.
础听听is a tax-advantaged听retirement savings account听that allows you to invest after-tax dollars and withdraw money tax-free in retirement. A few key things to know:
Unlike a traditional IRA, Roth IRAs are retirement savings plans funded with post-tax contributions, so any qualified distributions taken after age 59陆 aren鈥檛 subject to income taxes from the Internal Revenue Service. This means earnings from investments can be withdrawn tax-free as long as the account has been open for at least five years. Moreover, a Roth IRA can be funded from a variety of sources, including:
Generally speaking, money saved in an IRA can be used for any purpose 鈥 including college savings. However, if the withdrawal happens before the account owner reaches age 59陆, they鈥檒l pay a 10% penalty in addition to income taxes on the amount withdrawn.
Since contributions would have already been taxed, withdrawals from these plans generally don鈥檛 count as taxable income.
An exception to this is the 鈥," which makes withdrawals of earnings above the principal amount taxable when the IRA is less than five years old.
Using money from a听听for college savings is also possible, but it is subject to different rules. For example, the money invested can accumulate without being taxed until it鈥檚 withdrawn. However, ordinary income tax applies after withdrawals are taken, and distributions must begin after age 73.
This type of retirement account has an added benefit: There are no restrictions concerning how much money one earns to open the account. This makes it ideal for those who believe they will be in the same or a lower tax bracket later in life.
However, even though the 10% withdrawal tax is waived for qualified expenses such as education, paying income tax on the money withdrawn from a traditional IRA is still necessary. This means you will have to pay taxes on the amount of your withdrawal plus any accrued earnings since its deposit.听
Withdrawing from a retirement account to pay for college education and other non-retirement expenses may be tempting, but there are a few things to consider before making this decision, such as:
In addition to these considerations, it鈥檚 important to remember that an IRA is intended for retirement planning and savings and should be used wisely. Taking out funds for education expenses can delay your retirement goals, so it鈥檚 best to make sure you explore other financial aid options first, such as:
Ultimately, with so much to consider before taking money out of an IRA for education expenses, it鈥檚 necessary to do your due diligence鈥攑erhaps even consult a financial advisor鈥攐n the best course of action. This way, you can make sure you鈥檙e making informed decisions about your college savings plan that minimally impact or don鈥檛 affect your long-term financial goals.听
A graduate of Johns Hopkins University and its Writing Seminars program and winner of the Stephen A. Dixon Literary Prize, Michael Feder brings an eye for detail and a passion for research to every article he writes. His academic and professional background includes experience in marketing, content development, script writing and SEO. Today, he works as a multimedia specialist at 爱污传媒 where he covers a variety of topics ranging from healthcare to IT.
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