A Roth IRA for college planning can be an important strategy to help foot the education bill.

When you think about saving for college, what’s the first thing that comes to mind (besides worrying that you’ll have enough)?

The answer is likely 529 plans, as these are the most commonly discussed vehicles concerning college savings. But there are several other options to consider, like Roth IRAs.

Although Roth IRAs are primarily known for retirement savings, they can also be valuable tools for college saving and spending if you know how to make it work for you.

Should you use a Roth IRA for college planning? Let’s find out. 

The Mechanics of a Roth IRA

A Roth IRA is a tax-advantaged retirement investment vehicle. You fund the account with after-tax dollars, enjoy tax-free growth, and take tax-free qualified distributions in retirement. In 2021, you can contribute up to $6,000 with an extra $1,000 in catch-up contributions if over 50. 

While you can withdraw contributions at any time, you generally can’t touch earnings until you’re 59 ½ and have had the account for at least five years. Break these rules, and the IRS will stick you with a 10% early withdrawal penalty as well as income tax on the distribution. 

But Roth IRAs are exceptional, and there are some circumstances where you can tap earnings penalty-free, like qualified higher education payments (tuition, fees, books, supplies, room and board, etc.). 

A caveat: if you’re not yet 59 ½, you can withdraw Roth IRA earnings penalty-free, but you still have to pay income tax. Keep in mind that this tax just applies to withdrawn earnings, not contributions. So, the only way you’ll get out of paying any taxes on earnings is if you’re 59 ½ and mind the five-year rule.

The Benefits of Using A Roth IRA for College Expenses

Roth IRAs present investors with several benefits. 

First, you have a more comprehensive array of investment options. Many 529 plans only offer rigid investment selections (a few mutual funds or ETFs), but you have more flexibility with a Roth IRA. This flexibility allows you and your advisor to build your allocations with your specific goals, risk tolerance, and time horizon in mind.

Your Roth dollars can do double duty. While you can use some funds to cover tuition or other qualified college expenses, any remaining balance boosts your retirement nest egg. If you’re planning to use a Roth IRA to fund part of your child’s schooling, be sure not to over-dip into your retirement fund. Remember, there is no loan for retirement. You must ensure you prioritize your retirement plan. 

If you’re already 59 ½, you can withdraw contributions and earnings tax-free. Tap earnings before then, and you’ll have to pay income tax, but forego the early withdrawal penalty. 

The basic mechanics of a Roth IRA makes taking out necessary funds for your child’s higher education simple and straightforward. 

What else should you consider when creating a plan to fund your child’s college education? Take a look at this useful chart to help.

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Critical Drawbacks of A Roth IRA for College Planning

While Roth IRAs are flexible and straightforward, there are some “cons” to consider before making them your primary college funding avenue. 

Contribution limits are significantly lower than other vehicles; you can only directly contribute $6,000 per year, whereas you can fund up to $15,000 per year or $30,000 if married (gift tax limits) in a 529 or a custodial account. Depending on how much money you earn, you may not be able to directly contribute to a Roth IRA in the first place. 

The IRS sets income limits for direct Roth IRA contributions, and those limits are $140,000 for single filers and $208,000 for married filing jointly. While you can look into a Roth conversion (transferring funds from a traditional account into a Roth), that’s a more complex decision you’ll need to make with your advisor and tax professional.

Another thing to consider is that distributions from a Roth IRA count as income on the FAFSA, which could make it more challenging for your child to qualify for ongoing financial aid. 

Roth IRAs present essential investment opportunities for retirement. Not only do they boast tax-free withdrawals, but Roth IRAs are also one of the few accounts without required minimum distributions. Using funds for college planning could take away from your retirement efforts. If you want to use a Roth IRA for college, do your best to separate it from your retirement fund. 

Create a Comprehensive College Plan

Developing a financial plan for your child’s college career is essential to propel them forward with minimal debt and maximum confidence. 

Even though saving for college can feel like a sprint, it’s more like training for a half marathon. Take some time to develop a plan that’s aligned with your goals and complements rather than competes with your other financial needs.

Let Chladek Wealth help with your college planning to discuss if a Roth IRA is the right tool for your family’s college savings. Schedule an appointment to get a head start on your child’s financial plan before it’s too late.


The contents of this article are for general information and educational purposes and should not be construed as specific investment, financial planning, tax, accounting, or legal advice. Please consult with a professional advisor before taking any action based on the contents of this article. All investment and financial planning strategies involve the risk of loss that you should be prepared to bear. We cannot guarantee any investment performance whatsoever, and past performance is not indicative of potential future returns.