How to Tap into a Roth IRA for College Savings amp Education
How to Tap into a Roth IRA for College Savings & Education Skip to content
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Get Priority Access If your child is an independent student and is listed as both the owner and beneficiary of their 529, it will be counted as their asset and seriously detriment their ability to qualify for aid. If a 529 plan is held as a parent asset, it also affects financial aid eligibility, but to a lesser extent. A 529 plan owned by someone other than the parent or student is not reportable at all on the FAFSA, but distributions from such a plan are counted as student income, which can make it extremely difficult to qualify for aid.On the other hand, Roth IRAs are not counted among parental assets on the FAFSA and if you withdraw contributions, they won’t be counted as income either. A parent-owned Roth IRA and withdrawal of only contributions will have zero effect on financial aid eligibility. If earnings are withdrawn, however, they will be reported as parent income and probably have a minor effect. Students should NOT own significant amounts in Roth IRAs because that will count as a student asset and make it much harder to get financial aid. Contributions to a Roth or a 529 are not tax deductible (except at the state level for some 529 plans), though by contributing to a Roth IRA, you may qualify to earn the Saver’s Credit. If you can save less than $5,000 a year, Roth contributions alone may be your best bet ($10,000 if both parents are saving).However, if you’re able to save above this amount, complement the Roth IRA with a 529 plan. The benefit to the 529 is you don’t need to worry about contribution limits so much as you need to worry about gift tax. After you give $13,000 to a particular beneficiary in one year, taxes may be payable on the excess amount. So while a Roth IRA affects financial aid less, if you’re able to save more money, contribute the maximum to the Roth IRA and any excess to a 529 plan.
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By Kira Botkin Date September 14, 2021FEATURED PROMOTION
If you have children at home who hope to go to college someday (or someday soon), it’s important to plan ahead financially. College tuition is increasing every year and financial aid is never as generous as one could hope. You might already be familiar with 529 college savings plans, but you can also take advantage of another way to save for college – your Roth IRA. While it won’t generally be suitable as your only method, it can offer several advantages.Reasons to Use a Roth IRA for College Savings
Unlike a 529 plan, if your child doesn’t end up needing the money for college, you won’t incur a penalty to use it for something else. If you want to withdraw money from a 529 to use for a non-education related expense, you’ll be charged a 10% penalty.You can withdraw your Roth IRA contributions at any time without penalty or tax for any reason. You can also withdraw earnings without the 10% penalty if they’ll be used to pay for qualified education expenses. You will have to pay tax on those earnings if you choose to withdraw them, so you may want to leave them in the account for your own retirement. Roth IRA earnings are only tax-free if withdrawn after 59 1/2, even if used for education expenses (i.e. tax implications of retirement accounts).If you contribute to a Roth IRA and qualify for the Saver’s Credit, you could get a break on your taxes. On the other hand, contributions to a 529 plan or other college savings plans are not eligible for this credit.It’s important to consider the effect your savings will have on your child’s eligibility for financial aid. In general, parental ownership of and withdrawals from a Roth IRA will have no impact, or minimal impact, on financial aid eligibility. 529 plans, however, regardless of ownership, will negatively affect financial aid eligibility. Who owns the 529 plan determines how extensive the impact is.Roth IRA vs 529 College Savings Plan
Most individuals won’t be able to fully fund their child’s college expenses with a Roth IRA because of the maximum IRA contribution limits: $5,000 annually ($6,000 if you’re 50 and older). A 529 can be a great complement to saving with a Roth IRA. However, there are a few caveats to be aware of. Remember, a 529 can affect financial aid, while a Roth IRA typically does not.You own shares of Apple, Amazon, Tesla. Why not Banksy or Andy Warhol? Their works’ value doesn’t rise and fall with the stock market. And they’re a lot cooler than Jeff Bezos.
Get Priority Access If your child is an independent student and is listed as both the owner and beneficiary of their 529, it will be counted as their asset and seriously detriment their ability to qualify for aid. If a 529 plan is held as a parent asset, it also affects financial aid eligibility, but to a lesser extent. A 529 plan owned by someone other than the parent or student is not reportable at all on the FAFSA, but distributions from such a plan are counted as student income, which can make it extremely difficult to qualify for aid.On the other hand, Roth IRAs are not counted among parental assets on the FAFSA and if you withdraw contributions, they won’t be counted as income either. A parent-owned Roth IRA and withdrawal of only contributions will have zero effect on financial aid eligibility. If earnings are withdrawn, however, they will be reported as parent income and probably have a minor effect. Students should NOT own significant amounts in Roth IRAs because that will count as a student asset and make it much harder to get financial aid. Contributions to a Roth or a 529 are not tax deductible (except at the state level for some 529 plans), though by contributing to a Roth IRA, you may qualify to earn the Saver’s Credit. If you can save less than $5,000 a year, Roth contributions alone may be your best bet ($10,000 if both parents are saving).However, if you’re able to save above this amount, complement the Roth IRA with a 529 plan. The benefit to the 529 is you don’t need to worry about contribution limits so much as you need to worry about gift tax. After you give $13,000 to a particular beneficiary in one year, taxes may be payable on the excess amount. So while a Roth IRA affects financial aid less, if you’re able to save more money, contribute the maximum to the Roth IRA and any excess to a 529 plan.