Can Roth Ira Be Used For College

Can a Roth IRA exist used for college?

Father and daughter have breakfast in a kitchen

Catherine Delahaye/Getty Images

March 28, 2022 /
4 min read

March 28, 2022 /
four min read

At Bankrate we strive to help you make smarter financial decisions. While we attach to strict , this mail may contain references to products from our partners. Hither's an caption for

There are several reasons parents choose to tap into a Roth IRA to cover college tuition. For starters, Roth IRA funds tin can be invested in stocks, bonds, mutual funds, ETFs and plenty of other options, so the money has the potential to grow and compound over time. Contributions can exist withdrawn at any time without a penalty, and even earnings may be withdrawn without penalisation if they're used for didactics-related expenses. However, there are still some downsides and alternatives to consider.

Can a Roth IRA be used for college tuition?

While they're not specifically designed for college savings, Roth IRAs can be used to pay for a college didactics. Roth IRA accounts are funded with after-tax dollars and abound tax-free, and money can be withdrawn for educational purposes without a penalization — though you'll still have to pay income taxes.

With that said, there are contribution limits for this type of account. In 2022, those who run across income requirements to contribute to a Roth IRA can contribute up to $half-dozen,000 across a Roth and a traditional IRA. The exception is individuals who are age 50 or older, who can contribute an additional $one,000 per year in what is known as a "catch-up contribution."

Roth IRA withdrawal rules

Roth IRA withdrawal rules are considerably different from rules that apply to other retirement accounts. Since Roth IRA accounts are funded with subsequently-tax dollars, business relationship owners tin can withdraw their contributions (only not their earnings) before the standard retirement age of 59 ½ without paying any taxes or penalties.

The Internal Revenue Service (IRS) typically charges a 10 percent penalty on distributions that include earnings before retirement age. However, it provides several of import exceptions for Roth IRAs, including distributions to pay college tuition. Parents who withdraw earnings for college costs will have to pay income taxes on the amount but not an added fee.

How a Roth IRA could touch financial assistance

While distributions taken from a Roth IRA account are tax-free, distributions are counted as untaxed income on the following year'due south Gratuitous Application for Federal Student Assistance (FAFSA). In other words, using a Roth IRA for college can reduce eligibility for need-based assist. Nevertheless, the touch on depends on the amount of money withdrawn and which yr of school the distribution is made.

Pros and cons of using a Roth IRA to pay for higher

If yous're on the fence nigh using Roth IRA funds to pay for college, think about the advantages and disadvantages that could apply to your situation.

Pros

Using a Roth IRA for college tin reduce reliance on student loans. Parents who want to help their children avoid student loan debt can use Roth IRA funds to lessen their brunt.
Roth IRAs can be invested for long-term growth. Money invested in a Roth IRA can be invested in stocks, bonds, ETFs, index funds and more, giving you enough of options to customize your investment.
You go tax-free growth. Since Roth IRAs are funded with after-tax dollars, the money can grow tax-free over time.
There is no penalty for education-related withdrawals. As long as the funds are used for education-related expenses, you won't exist penalized for withdrawing money from a Roth IRA.

Cons

Using a Roth IRA cuts into retirement savings. If yous use too much of your Roth IRA funds to cover higher didactics expenses, y'all may fall behind on retirement goals.
Roth IRA accounts can lose coin. While investing with a Roth IRA can help you grow your portfolio over time, stocks, bonds and other investments can also lose money. This ways that y'all could have less coin for college than you started with, depending on your timeline.
Financial assistance could be impacted. Distributions from a Roth IRA volition count as income on the FAFSA, which may reduce your child'southward financial aid.
You lot'll be subject to income and contribution limits. Different with other savings vehicles, y'all won't be able to contribute to a Roth IRA if you exceed the income threshold. Yous can also contribute only $6,000 or $vii,000 a year, depending on your historic period.

Roth IRA vs. 529 plan

Earlier using a Roth IRA programme for a college education, you lot may also want to consider a 529 college savings programme. A 529 plan is a type of investment business relationship specifically designed for a higher didactics, which grows your contributions on a tax-deferred basis. There are some significant advantages that come with saving for college in a 529 program over a Roth IRA, although some of the benefits depend on your situation.

For example, some states offer revenue enhancement benefits to those who contribute to a 529 savings plan. In the land of Indiana, for example, individuals can score a 20 per centum taxation credit on upwards to $5,000 in 529 programme contributions each year. Many other states offer tax deductions for 529 plan contributions.

1 of the master benefits of a 529 program is that the contribution caps are much college than those of a Roth IRA. You can invest 529 funds in any number of investment options, including stocks, bonds and target date funds, though investment options for 529 plans tend to be more than express than those for Roth IRA accounts.

All this existence said, 529 college savings plans practise require you to use the money for eligible higher tuition and fees. You can withdraw the funds for other purposes if your child doesn't end up needing them, but you'll accept to pay normal income taxes and a 10 per centum punishment on the earnings portion of each withdrawal y'all make exterior of educational expenses.

Bankrate insight

In general, a Roth IRA is best for savers who aren't certain how much their child volition need for college. A 529 plan is better if you need to put away more money at one time.

Learn more than:

529 plan vs. Roth IRA: Here's how families tin can use both to save for college
Best Roth IRA accounts
What is a 529 college savings plan and how it works

Holly Johnson writes expert content on personal finance, credit cards, loyalty and insurance topics. In addition to writing for Bankrate and CreditCards.com, Johnson does ongoing work for clients that include CNN, Forbes Advisor, LendingTree, Time Mag and more.

Edited by

Student loans editor