Smart to Use Roth IRA for College

Should I use my Roth IRA for college?

As a former financial planner, I would often get these questions from clients who read something somewhere. Much like patients asking doctors about drugs they heard about on TV, such questions rarely ended up being a good idea. When it comes to using a Roth IRA to save for college, it actually is a good idea.

Can You Use Roth IRA to Pay for College

First, you probably know that a Roth IRA is designed for retirement savings. The corresponding vehicle for parents saving for college is a 529 college savings plan. In general, the best way to save for college is in a 529 plan versus a Roth IRA. However, if you are planning to seek need-based financial aid, a Roth IRA might be the better solution for your family.

roth ira for college classroom

Can I Use Roth IRA to Pay for College?

Let’s start with CAN you use a Roth IRA to pay for college. We’ll look at SHOULD you use a Roth IRA for college next.

As you may know, a Roth IRA offers tax-advantaged growth for investments within the account. This creates two kinds of money inside of a Roth IRA. The first kind of money is contributions. Contributions are the monies directly deposited into the account. They do not include any dividends, interest or gains on investments. If you put $5,000 in a Roth IRA for 10 years, then your contributions are $50,000, no matter what the account is actually worth. Any amount above $50,000 is earnings. – Be very sure that you understand this concept because everything else hinges on getting it right.

How To Use a Roth IRA to Pay for College

There are two features of a Roth IRA that allow for its use to fund college without paying penalties. First, all contributions can be withdrawn without penalty or taxes. In other words, in the case above, the taxpayer could use $50,000 to pay for college (or anything else for that matter) without taxes or penalties.

The second feature is that there is an exception allowing Roth IRA funds to be used to pay for qualified college expenses. Tuition, fees, books, supplies and equipment, at an institution with the word university or community college in the name are pretty much all covered.  (Typically, non-degree programs like a coding bootcamp, or writers retreat don’t count. However, you might be able to make coding bootcamp tax deductible.) You are allowed to pay such expenses for yourself, your spouse, your children, and their descendants (that means grandkids and great grandkids are included).

However, this Roth IRA distribution exception only applies to the penalties that would ordinarily be due. The withdrawal does still count as taxable income. This can be a double whammy, because not only do you owe taxes on these funds, but it also increases your income for purposes of financial aid. Since financial aid takes into account your income, artificially inflating it by taking funds from your Roth IRA is not a good strategy.

Thirdly, unlike most state run 529 plans; a Roth IRA lets you choose a wider range of 529 investment options.

Is It Smart to Use Roth IRA for College?

The Roth IRA is not designed to pay for college and if you need a way to save additional money for retirement, using your tax-free retirement account is not the best idea. Remember, there are student loans, but there is no such thing as retirement loans.

The real purpose of using a Roth IRA to pay for higher education is that money inside of a Roth IRA counts as retirement savings. Retirement savings do not count toward your personal assets. Money inside of a 529 plan does. Much like with taxes, the more money you can shield from financial aid calculations the better.

A parent’s expected contribution is a federally calculated number based on your entries on the FAFSA, the Free Application for Federal Student Aid. The number is based on your income, and on your current assets. You are expected to contribute 5.6% of your assets to your child’s education. So, if you have $100,000 in a savings account, the financial aid math will say that you should contribute $5,600 of that you your child’s education each year. However, if you have $50,000 in a savings account and $50,000 of contributions to a Roth IRA, the math says that your expected contribution is $2,800 because retirement savings do not count.

What is the Catch Using Roth IRA for College?

Of course, there is a catch.

First, Roth IRA contributions are only allowed for taxpayers under a certain income threshold. If you are over the Roth IRA income limit, then you cannot contribute to a Roth IRA.

Second, you can only contribute up to the Roth IRA maximum contribution limit each year. For 2022, the amount you are allowed to contribute is $6,000 with a $1,000 catchup contribution for taxpayers 50 years and older.

That means you can’t just decide to move $50,000 into your Roth IRA the year your kiddo starts college. You have to plan ahead and stuff as much money as possible in a Roth IRA each year. The good news is that there is really no reason to not put money into a Roth IRA when you can withdraw those contributions whenever you like. However, if you invest that money, all investments have risk, and your balance may drop below the amount you contributed. (If you plan on potentially needing the money you put into a Roth IRA in the near future, just get the funds into your brokerage’s money market account. The interest rate is usually very competitive (better) than any bank’s interest rate, and then your money can grow, but be safe.)

Now, if you need an IRA to make your retirement plan work, then you can’t use this financial aid hack. While you can contribute to both an IRA and a Roth IRA, the annual contribution limit applies to all of your IRAs together. So, if you need to put $3,000 in an IRA for your retirement financial plan, then you can only contribute another $3,000 (up to the $6,000 maximum) each year to your Roth IRA.

Spouses and Financial Aid

Don’t forget that all IRA accounts are individual accounts. That means a married couple can contribute $6,000 each into their own Roth IRA accounts, effectively shielding $12,000 in assets.


By Brian Nelson – Brian is a former Certified Financial Planner and financial advisor. He writes for the Finance Gourmet and other financial publications. The material provided on this website is for informational use only and is not intended for financial or investment advice. Please note material may not be regularly updated and that some of the information may not therefore be current. Consult with your own financial professional when making decisions regarding your financial or investment options.

3 thoughts on “Smart to Use Roth IRA for College”

  1. A Roth IRA is one way that you can go for paying for college, but there are other savings options as well. Weighing the pros and cons is important to figure out which is the ways to go. Great information, thanks for sharing!


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