What Do I Need to Know About Using My Roth IRA to Pay for My Child’s College?

By Joe Messinger, CFP®

February 15, 2024

3 min READ

Paying for college can feel overwhelming. With costs continuing to rise, families are looking for creative ways to fund their children’s education – without taking on massive amounts of debt. 

One often underutilized strategy is to use a Roth IRA to cover a portion of your child’s tuition and expenses. This can be a strategic financial move, but there are important considerations to keep in mind before taking the leap. Here’s what you need to know:

Tax-Free Withdrawals of Contributions 

Contributions to a Roth IRA are made with after-tax dollars, meaning you’ve already paid taxes on the money you put into the account. As a result, you can withdraw your contributions at any time without incurring taxes or penalties. This makes a Roth IRA a flexible source of funds for college expenses. 

However, it’s important to note that while contributions can be withdrawn tax-free, earnings (interest, dividends, or capital gains) in your Roth IRA are subject to a different set of tax rules. Let’s break it down.

For earnings to be withdrawn tax-free, the following must be true:

1. The account must have been open for at least 5 years.
2. The account owner must be at least 59 ½ years old. 

If you’re comfortable paying taxes on your earnings at the time of withdrawal, you can withdraw them before age 59 ½ as long as the account has been open for a minimum of 5 years. 

If you don’t meet the 5-year minimum, you’ll owe a 10% withdrawal penalty along with having to pay taxes on your earnings when you withdraw them.

Impact on Retirement Savings

Withdrawing funds from your Roth IRA for your child’s college expenses may impact your retirement savings. Before drawing down your Roth IRA account, consider the long-term effects on your retirement goals and financial stability. A few questions to ask yourself might be:

1. Were these funds earmarked for retirement?
2. Do I have a plan to replace the funds?
3. Am I on track for my retirement savings goals?

Remember, retirement savings should ideally remain untouched until retirement to benefit from potential compounding growth. Even if student loans aren’t the optimal choice for you and your soon-to-be college student, they exist for a reason. There are no loans for retirement, and short changing yourself now could have detrimental consequences. 

Financial Aid Considerations

It’s also important to keep in mind that withdrawals from a Roth IRA for college expenses may affect your child’s eligibility for financial aid. While Roth IRA assets are not counted as assets on the FAFSA, the full amount of the withdrawals can be considered income in the following year’s FAFSA calculation. 

This could reduce your child’s eligibility for need-based aid. If you are a financial aid recipient, one way to avoid this impacting your financial aid eligibility is to wait to utilize your Roth IRA funds until your child’s Junior year of college. Because your FAFSA looks at the ‘prior prior tax year”, this can help to set you up for success – freeing up the Roth IRA funds for use without negatively impacting future financial aid.

Exploring Alternate Funding Options

Before tapping into your Roth IRA, explore other funding options for college, such as scholarships, grants, 529 Plans, education savings accounts (ESAs), or student loans. Each option has its own advantages and considerations – and every avenue should be explored prior to making any drastic decisions about the funds in your Roth. 

Have Questions?

Whether you’re considering withdrawing from a Roth IRA to cover a college funding gap, or you want to figure out how paying for college costs fits into your broader financial plan, we can help. Our team is focused on helping your college-bound family find the most affordable path to college without sacrificing retirement or long-term financial stability.

Reach out to us today by clicking here. We can’t wait to hear from you and to learn more about your unique goals and college questions.