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A Roth IRA for College Expenses

Aug 19, 2012

The only other financial challenge you have in your life besides saving for retirement is saving for college. Certainly, saving for retirement allows you the benefit of a long time frame. Saving for college, in necessity, cuts your time frame to am intensive few years. Balancing and trying to both tasks well is a challenge.

One way people do both is by using a Roth IRA. A Roth has a rule where you can withdraw funds for college expenses. You may already have a 401k at work and are currently fully funding it. As a good saver you also have a Roth IRA. With retirement funded you know want to move on to college saving.

After pursuing your investment options, you decide it would be a good idea to use your IRAs to pay for college expenses.

Saving for college with an IRA

You may not even have an IRA yet or even a more traditional form of college saving, a 529 plan. One of the nice things about an IRA is the flexibility of the accounts. You can use them to pay for retirement, or you can use them to pay for what are called qualified education expenses.

Roth IRA can be used for higher education expenses

You can use an IRA for college expenses because of the generous exception rules when making withdrawals before the normal no penalty age of 59 1/2. If you do not follow the IRS rules strictly you will be subject to penalties. If you want to tap your IRA before 59 1/2 the exception are as follows:

  • You are disabled 
  • You use the distribution to pay certain qualified first-time home buyer expenses 
  • The distributions are part of a series of substantially equal payments 
  • You have significant unreimbursed medical expenses 
  • The distributions are not more than your qualified higher education expenses, which would include college / university costs 

If you’re only removing enough money to pay for qualified higher education expenses, then you don’t pay any tax penalties on the monies removed. But what exactly are qualified higher education expenses?

What are qualified education expenses?

Qualified higher education expenses include tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution. An eligible education system is any college, university, vocational school, or other post secondary educational institution that is eligible to participate in a student aid program administered by the Department of Education. This definition includes nearly all accredited public, nonprofit, and privately owned / profit-making post secondary institutions.

Who can use an IRA for education expenses?

The tax law says eligible individuals include yourself, your spouse, your children, your spouse’s children, your grandchildren, or your spouse’s grandchildren.

Other benefits to using a Roth IRA for education expenses

  • accounts grow tax free. 
  • you can shelter retirement accounts when you apply for financial aid. 
  • you have personal control to either use the funds to pay for college or retirement. 

If you decide to use this strategy for college financing do not wait to long. IRS rules state that you need to hold the IRA for at least 5 years before withdrawing funds.

Got further questions? Catch me on twitter and DM me @529SavingsPlans or e-mail me at 529CollegePlans at Gmail.comWant to be heard? Leave a reader comment below.

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