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Roth IRAs: good for college savings for not?

Founder & CEO
Wallis is a mom who spent 10+ years at Goldman Sachs as a banker and investor. She founded AboveBoard as a "safe harbor" where people are treated with integrity and can make big decisions with ease and clarity. AboveBoard's interactive Parents' Financial Guide helps you make the right decisions for your family.

Here's a cool feature of Roth IRAs: you can withdraw your contributions at any time, with no penalty or tax. (This is not true for Traditional IRAs, just to be clear.)

But if you're thinking that means you could pull some Roth IRA contributions (no earnings just yet) out to pay for your child(ren)'s college, there are 2 really important points to understand.

2 Things You Must Know Before Using Roth IRA Contributions for College Expenses

1) Taking out your own contributions to a Roth IRA would reduce your child's financial aid

The irony of this is that the account balances of retirement accounts are not counted in FAFSA, but the moment you pull money out of your Roth IRA (or your Traditional IRA, for that matter) it shows up on the FAFSA and is treated the same way as income: FAFSA wants you to contribute 22% - 47% of it per year towards your little one's education. (Where you fall in that range depends on your income and assets.)

Yikes! You just went from a Roth IRA that - if left alone - would show up nowhere on FAFSA, to "income" where you're expected to contribute 22-47%.

You might say: Wait, that was my money originally, why is it being treated like income? Answer: FAFSA doesn't care. Check out Question 94e of the FAFSA instructions to see that FAFSA wants you to enter your untaxed distributions from IRAs. That amount gets entered on the FAFSA Expected Family Contribution and is treated the same as salary & wages.

The overlap in the Venn diagram of "people who are income eligible to contribute to Roth IRAs" and "people who receive some financial aid under FAFSA" is very high, given the income limits for Roth IRAs and the FAFSA calculations themselves.

You might be surprised to learn that the FAFSA calculations generally produce aid awards for families with income in the "low 6-figures". The detail is good fodder for another post, but you might reasonably expect some aid up to the low-$200,000 household income range. For families with multiple children in college at the same time, it can be a bit higher.

2) Roth IRAs are not designed to hold that much money. You could be putting your own retirement at risk by using the funds for college.

Roth IRAs have an annual contribution limit of $5,500 ($6,500 if you're 50+). When you run the math on that (you can assume different rates of return + timeframes) it's very unlikely that a Roth IRA alone will have excess funds for college expenses.

However, if you have another meaningful source of retirement income - e.g. a 401k, 403b, pension, etc., - then you might find that you have "excess" retirement money in your Roth IRA. That decision is best made after running the math. Do not guess or "sense" the answer!

To see how other college savings strategies compare, check out our interactive college savings guide for recommendations tailored to situation and goals.

What You Must Know Before Using Roth IRA Earnings for College Expenses

You'd only use Roth IRA earnings for college expenses after you withdrew all your contributions. So everything above would apply. 

Let's clear up a common misunderstanding about Roth IRAs and education expenses: if you withdraw before age 59 1/2, then using the withdrawal money for qualified higher education expenses does not free you from taxes. You will still owe ordinary income tax on any earnings (again, you'd withdraw all your contributions first).

The exception for education expenses only saves you from having to pay the 10% additional tax penalty. 

So if you're withdrawing earnings before the age of 59 1/2, you will have made your Roth IRA subject to income tax when it otherwise would not have been.

So When Does Using a Roth IRA for College Savings Make Sense?

If you're unsure you can afford to save for college at all, and are trying to shore up your own retirement - give yourself permission to prioritize retirement over college savings. We all love our kids, but your biggest financial gift to them truly is your own financial stability. Put that first. Then look to save for college.

If, down the road, you realize you have some extra funds in your Roth IRA, the option to use contributions tax-free (but keeping in mind the financial aid impact - it counts the same as income) is available.

You have a solid source of retirement income that's not your Roth IRA, and you don't plan to seek any financial aid - maybe there's a family trust that pays a big portion of everyone's higher education in your family? That's true for a relatively small (but lucky!) group of people.

Learn more about ways to save for college with our interactive AboveBoard College Savings Guide.

Additional Resources

Want to see the IRS say it's cool to take out your Roth IRA contributions any time, no tax or penalties due, IRS doesn't care how old you are?

Check out IRS Publication 590-B p30 - "Are Distributions Taxable?" It's the part where they say "return of regular contributions" are not part of your gross income.

Want clear, honest info about saving for college?
Check out our interactive guide tailored to your situation and goals.
Go to our College Savings Guide