Use a Roth IRA to Save for College Higher Education Expenses

While a 529 account is the primary tax-advantaged vehicle  to save for your kids education, it is not enough with the cost of college going up. A way to also help save for your child’s college education is to contribute to a Roth IRA especially with the cost of college now  $30,000‒$35,000 per student per year, according to College Board.

ROTH IRA Basis Can be Distributed at Anytime & for ANY purpose?

A Roth IRA is deal for college planning because distributions can be made The contributions (basis) can be distributed at any time tax and penalty free no matter your age or how the funds are used. Therefore, you can use the Roth IRA basis (contributions) to pay for your college or your kids college or even high school.

The Rules are Different for Roth IRA Gains

Gains can only be distributed penalty free if an exception like the the higher education expense exception.While if distributed prior to reaching age 59 1/2 and if 5 years have not lapsed since the Roth IRA was first funded, penalties will apply to amounts stemming from conversions or transfers from other employer retirement plans, there is an exception for these distributions if the funds are used to pay for higher education expenses. For this exception to apply the funds have to be used to pay for college at an eligible educational institution for the IRA owner, the IRA owner’s spouse, or any child or grandchild of the IRA owner or IRA owner’s spouse.

Expenses include tuition, fees, books, supplies, computer technology, equipment required for enrollment or attendance at an eligible educational institution, special needs services for special needs students, and room and board for students enrolled at least half time.

What is an Educational Institution?

Any college, university, vocational school, or other postsecondary educational institution eligible to participate in the student aid programs administered by the U.S. Department of Education, which generally includes all accredited, public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions.

How is a Child Defined for the Exception?

A child is defined as a son, daughter, stepson, stepdaughter, adopted child, and eligible foster child of the  Roth IRA account holder.

What Amount of Non-Qualified Roth IRA Distribution Funds can be Used?

Roth IRA nonqualified distributions of earnings are penalty-free as long as they do not exceed the amount of qualified higher education expenses for the taxable year. Also, no dollar limit applies on the amount of higher education expenses that can be considered for penalty exception purposes.

About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>


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