As we approach “back to school” season, there are a plethora of ways to fund a student’s college journey. Financial aid, grants, scholarships, subsidized loans, 529 plans and numerous other options exist. However, few people ever consider paying for school with a Roth IRA account. Though IRA’s are specifically designed to be retirement nest eggs, they have several benefits which make them very useful for paying education expenses.
First, unlike 529 plans, Roth accounts are not reported as assets on the FAFSA (Free Application for Federal Student Aid) form. By increasing a family’s net assets, savings in some college plans can actually count against the money a student receives for financial aid. By putting these savings in an IRA, it is possible to reduce a family’s total assets and give a student more of a chance to receive federal aid.
Second, funds that are put into a Roth IRA are flexible. With 529 plans, taxpayers are left with few options if the beneficiary receives a large scholarship or decides not to go to college. Non-qualifying distributions from 529 plans can be both taxed and penalized.
However, Roth accounts have a different set of rules. As long as the Roth has existed for at least 5 years, and the account holder is over 59½ year of age, all withdrawals are tax free. This means that correctly managed IRA funds have zero tax risk.
Finally, any amount that is personally contributed to a Roth IRA has no restrictions. This means that parents can begin to save money while their child is young; resulting in a large fund by the time they have graduated high school. This money can be withdrawn tax free at any time, no matter the circumstances. The fund also accumulates interest during these years, which becomes tax-free after the normal withdrawal requirements are met.
The flexibility and tax-breaks provided by a Roth IRA makes it a clear choice for people who are looking to help their children pay for a college education. Whether parents are looking to start a savings plan or enhance their current plan, a Roth fund is definitely an option worth consideration.