The Pros and Cons of Using a Roth IRA to Pay for College

If you’ve researched ways to save for your child’s college education, you likely already know about the benefits of 529 plans. But there are other options to consider.

One less common alternative savings plan that some people have used for college is a Roth individual retirement account, or Roth IRA. You probably know a Roth IRA as a type of retirement account — because that’s what it is. But you can use these funds to pay for other non-retirement goals.

Here’s how to use a Roth IRA to help pay for your child’s college education along with some reasons why this might not be the best option, depending on your personal situation.

What is a Roth IRA?

A traditional IRA offers a tax benefit when you put funds in — but you will pay taxes on your contributions and any investment growth when you withdraw your money in retirement. A Roth IRA is a retirement account funded with after-tax dollars. That means you won’t get a tax benefit now, but this type of account allows you to take your withdrawals tax-free when you reach retirement age.

If you are age 59 and ½ or older and have had your account for at least five years, you can withdraw your contributions and earnings with no tax or penalty and use those funds however you choose. If you are not yet 59 and ½ or don't meet the five-year rule, you can withdraw your regular contributions tax and penalty free for any reason, including college expenses.

As long as you use the funds for very specific purposes — qualified education expenses being one of them — you can avoid paying the typical 10-percent early withdrawal penalty on distributions of earnings and distributions of conversion contributions. You may still have to pay income tax on the earnings portion.

The benefits of using a Roth IRA to pay for college

1. Earnings accumulate tax-free and you won’t have to pay penalties if you use them for qualified education expenses.
2. Because the Free Application for Federal Student Aid (FAFSA) does not include retirement accounts when applying for financial aid, these funds won’t factor into how much aid your child will qualify for as some other college savings accounts might.
3. Because distributions are not mandatory from Roth IRAs, you (as the owner) have complete discretion as to how to use the funds. So you can use them to help pay for multiple students' expenses, not only one. You can apply any money that you don't need for educational expenses to your retirement.
4. You will likely have more investment options to choose from than are offered by most 529 savings plans.

The drawbacks to using a Roth IRA to pay for college

There are some reasons you might want to think twice about using a Roth IRA as a way to save for college, especially if it’s the only college savings account you are funding.

1. Only earned income can be put into a Roth IRA. That means you can’t use profits from other investments, such as income from rental properties or assets you’ve sold.
2. Contributions are currently capped at $6,000 ($7,000 if you’re age 50 or over) and are subject to an adjusted gross income phase-out, depending on how much income you earn.
3. You might be tempted to pay for your child’s college with money that should be designated toward your own retirement savings. Even though you want to help cover your child’s education, it’s not advisable to do so at the expense of your own retirement.

Ultimately, if used properly, you can use a Roth IRA to help save for your child’s college costs. But it’s always a good idea to consult with a financial advisor to help you balance all of your goals and navigate this complicated process.

This publication is not intended as legal or tax advice. Taxpayers should seek advice based on their particular circumstances from an independent tax advisor.  All investments carry some level of risk including the potential loss of all money invested.