As you watch your child grow and explore their interests, your thoughts may turn toward what their future career might be—and the potential college expenses necessary to get them there.
There are a lot of ways you can save up to pay for higher education costs, but one you might not have considered is a Roth IRA. If you've only ever thought about these accounts in terms of retirement savings, here's some insight into the pros and cons of using a Roth IRA to finance your child's education.
How can you save for college with a Roth IRA?
In 2023, you can contribute up to $6,500 to a Roth IRA if you're under age 50 and up to $7,500 if you're 50 or older.
Anyone is eligible to contribute to a Roth IRA as long as they're under the income thresholds.
- For 2023, your modified adjusted gross income (MAGI) must be less than $228,000 if you're married and filing jointly.
- For single filers, that cap is $153,000.2
- If you're
over the income limitand can't contribute to a Roth IRA in your name, you still may be able to open an account in your child's name as long as they have earned income.
Roth IRA withdrawal rules & qualified higher education expenses
Your Roth contributions come out first when you take a distribution. You can use the contributions to cover higher education expenses without tax or penalty. If there are not sufficient funds from contributions you then could access the Roth IRA earnings. Normally, you would incur a 10% early withdrawal penalty and taxes when you take earnings out of a Roth IRA before turning age 59½ and reaching the
However, the IRS has several exceptions to the early withdrawal penalty and using a Roth IRA for qualified higher education expenses avoids the penalty. However, the earnings portion of the withdrawal—not the contributions—is still considered taxable income.
Qualified higher education expenses include:
- Tuition and fees
- Books and supplies
- Equipment required for enrollment or attendance
- The cost of special needs services in connection with enrollment or attendance
- Room and board (as long as the student is enrolled at least half time)
Should you use a Roth IRA for education expenses?
A Roth IRA can be a useful tool for college savings and helping your child advance toward the career they've envisioned for themselves. However, it's essential to understand the benefits and drawbacks to help you make the right decision for your family and financial circumstances.
3 pros of using a Roth IRA for college expenses
1. Any unspent funds still are usable for retirement
If your child decides not to go to college, gets scholarships or doesn't need all the funds in the Roth IRA for education expenses, the account can be kept as a retirement savings vehicle. This gives families more flexibility with their savings while maximizing tax benefits.
2. Your Roth IRA balance has no effect on financial aid
Money in a Roth IRA isn't counted when calculating your
3. You have a wider selection of investments
Roth IRAs typically offer more investment options than other education savings vehicles.
2 cons of using a Roth IRA for college expenses
1. Your annual contributions have a low cap
With annual contribution limits for Roth IRAs at a maximum of $7,500 (or $6,500 if you're younger than 50), you may not be able to save enough to cover the total cost of your child's education.
2. The distributions will be partially taxable
While you can avoid paying an early withdrawal penalty on any distributions used to cover qualified education expenses, you typically have to pay regular income tax on the earnings portion of your withdrawals.
Explore other college savings options
Should you use a Roth IRA instead of a 529 plan?
You could, but it's more likely you'd be better off using a Roth IRA to save for education expenses in addition to a
- 529 plans have higher contribution limits. The annual limits for 529 plans are much higher than the contribution limits for a Roth IRA, ranging from around $235,000 to more than $500,000 per beneficiary.
- 529 plans have additional tax benefits. Distributions from a 529 that are used for qualified education expenses won't incur income tax. Plus, many states offer state income tax breaks for 529 contributions.
- 529 plans define "educational use" more broadly. Money in both a Roth IRA and a 529 can be applied toward post-secondary tuition and affiliated costs. However, a 529 also can fund K-12 tuition and be applied to student loans up to certain limits.
But there's at least one key reason to consider putting at least some money in a Roth IRA over a 529 plan:
- 529s are considered in financial aid awards. The
FAFSA counts 529 plansowned by the parent or student when determining financial aid eligibility. The contents of a Roth IRA are not.
Help with understanding all your college savings options
Education costs have been on many parents' minds as they've been rising significantly lately. Many savings options exist, and Roth IRAs are just one that may fit into your financial strategy. If you're unsure which route is best for you, connect with a