11.17.20

Why a Roth IRA for college savings makes sense

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College savings

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See how using a Roth IRA provides more flexibility for paying for higher education.

With the high cost of college, it’s never too soon to start saving. If you’ve thought about a 529 plan for a child or grandchild, there’s another option to consider: a Roth IRA.

Naturally, your first thought might be, “Wait, aren’t Roth accounts for retirement?” And, yes, that is their primary purpose. However, Roths offer flexibility. The funds you contribute can be withdrawn early without penalty if the money is used for certain purposes—like paying for higher education.

A Roth refresher

If you’re not familiar with a Roth IRA, it’s a savings tool funded with money you’ve already paid taxes on. When you reach age 59½, you can withdraw contributions and earnings tax-free. If you make withdrawals of contributions before 59½, you’ll owe a 10% penalty; if you withdraw earnings early, you’ll owe income tax and the penalty on those funds.

An exception to the rule

One exception to the rule on early withdrawals is qualified education expenses. If the money is used for tuition, fees and other expenses required for enrollment, the 10% penalty does not apply when you make early withdrawals of contributions.

Your child could get more financial aid

529 plans are structured two ways: as savings plans and prepaid tuition plans. Either way, schools factor 529 plans into financial aid decisions. This could mean less financial aid for your student than if their college savings were in a Roth IRA.

Roth IRA assets are not counted for financial aid determinations but income from a Roth is.  (The Motley Fool provides an explanation of the calculus of financial aid using a 529 versus a Roth IRA and how you might time using funds from both.)

A more flexible option

If your child decides not to go to college, any 529 funds used for non-qualified expenses may require you to owe taxes and a 10% penalty. With a Roth IRA you get more flexibility because contributions can be withdrawn early for other qualified expenses such as a first-time home purchase or unreimbursed medical expenses or health insurance if you’re unemployed.

If your child opts not to go to college, you can keep the Roth funds in your retirement portfolio. After age 59½, you’d still have the option to withdraw funds tax- and penalty-free. You could use the money for yourself or to help your child start a business, buy a home, travel or do anything else.

We’re here to help

There’s a lot to consider when planning how to finance higher education. Roth IRAs are just one of the many options available. Here at Consumers, we’d love to help you with a plan. Call us at 800-991-2221 to get started.

Consumers provides banking services for more than 100,000 members. If you have banking questions, call us at 800-991-2221. We make it easy to bank how you want, when you want.

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College savings

Need a plan to pay for college? We can help.

Learn more

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