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Key takeaways
- Both a Roth IRA and a 529 Plan are valid ways to save for a college education. Each has unique benefits and limitations.
- Starting in 2024, unused funds in a 529 account may be converted into a Roth IRA if the investor so chooses, though there are pros and cons.
- Families should carefully assess which type of account will give them the most benefit. Some people decide to leverage both for college savings purposes.
A Roth IRA can be used as a savings vehicle for college. You can withdraw your Roth contributions at any time without penalty to pay for any expense. You can also use Roth earnings without penalty to cover qualified education expenses, such as tuition and fees.
Before you use a Roth IRA for college, it’s a good idea to be aware of the advantages of disadvantages so you can assess whether it makes sense for you and your family. Be aware that, in some cases, a 529 plan may be a better fit for your circumstances.
Can you use a Roth IRA for college tuition?
While they’re not specifically designed for college savings, Roth IRAs can be used to pay for a college education. Roth IRA accounts are funded with after-tax dollars and grow tax-free, and money can be withdrawn for educational purposes without a penalty — though you’ll still have to pay income taxes.
With that said, there are contribution limits for this type of account. In 2024, those who meet income requirements to contribute to a Roth IRA can contribute up to $7,000 across a Roth and a traditional IRA. The exception is individuals who are age 50 or older, who can contribute an additional $1,000 per year in what is known as a “catch-up contribution.”
Keep in mind that if your modified adjusted gross income (MAGI) exceeds $146,000 for heads of household or $230,000 for married couples, you will be subject to reduced annual contribution limits. These limits are assessed annually by the IRS and tend to fluctuate each year.
Roth IRA withdrawal rules
Roth IRA withdrawal rules are considerably different from rules that apply to other retirement accounts. Because Roth IRA accounts are funded with after-tax dollars, account owners can withdraw their contributions (but not their earnings) before the standard retirement age of 59 ½ without paying any taxes or penalties.
The Internal Revenue Service (IRS) typically charges a 10 percent penalty on distributions that include earnings before retirement age. However, it provides several important exceptions for Roth IRAs, including distributions to pay college tuition. Parents who withdraw earnings for college costs will have to pay income taxes on the amount but not an added fee.
For parents who are making withdrawals after the age of 59 and one-half, no penalties apply, regardless of whether the funds are being used for college or not. However, the longer a parent is able to leave funds parked in investments, the more these savings can grow.
How a Roth IRA could affect financial aid
While distributions taken from a Roth IRA account are tax-free, distributions are counted as untaxed income on the following year’s Free Application for Federal Student Aid (FAFSA). In other words, using a Roth IRA for college can reduce eligibility for need-based aid. However, the impact depends on the amount of money withdrawn and which year of school the distribution is made.
Pros and cons of using a Roth IRA to pay for college
If you’re on the fence about making a Roth IRA education withdrawal, consider the advantages and disadvantages that could apply to your situation.
Pros
- Using a Roth IRA for college can reduce reliance on student loans. Parents who want to help their children avoid student loan debt can use Roth IRA funds to lessen the burden of borrowing.
- Roth IRAs can be invested for long-term growth. Money invested in a Roth IRA can be invested in stocks, bonds, ETFs, index funds and more, giving you plenty of options to customize your investment.
- You get tax-free growth. Since Roth IRAs are funded with after-tax dollars, the money can grow tax-free over time.
- There is no penalty for education-related withdrawals. As long as the funds are used for education-related expenses, you won’t be penalized for withdrawing money from a Roth IRA.
Cons
- Using a Roth IRA cuts into retirement savings. If you use too much of your Roth IRA funds to cover higher education expenses, you may fall behind on retirement goals.
- Roth IRA accounts can lose money. While investing with a Roth IRA can help you grow your portfolio over time, stocks, bonds and other investments are also at risk for losing money. This means that you could have less saved than you started with, depending on your timeline.
- Financial aid could be impacted. Distributions from a Roth IRA will count as income on the FAFSA, which may reduce your child’s need-based financial aid eligibility.
- You’ll be subject to income and contribution limits. Unlike with other savings vehicles, you won’t be able to contribute to a Roth IRA if you exceed the income threshold. You can also contribute only $7,000 or $8,000 a year, depending on your age.
Roth IRA vs. 529 plan
Before using a Roth IRA plan for a college education, you may also want to consider a 529 college savings plan. A 529 plan is a type of investment account specifically designed for a college education, which grows your contributions on a tax-deferred basis. There are some significant advantages that come with saving for college in a 529 plan over a Roth IRA, although some of the benefits depend on your situation.
| Detail | Roth IRA | 529 Plan |
|---|---|---|
| Eligibility | Restrictions apply past a certain income threshold | No income restrictions |
| Tax deductibility | No | Yes, in some states |
| Tax-free withdrawals | Yes – though earnings may be taxed as income | Yes – tax-free and penalty-free |
| Annual contribution limit | $7,000 ($8,000 if age 50 or older) | No federal limit; varies by state, but generally with higher caps than a Roth IRA |
| Holding period | Account must be open for 5 years before a withdrawal can be made | None |
| Impact on financial aid | May impact need-based aid eligibility; withdrawals count as income | May or may not impact need-based aid; withdrawals are not counted as income |
| Penalty-free uses of invested funds | Retirement savings, first-time home purchase, qualifying birth or adoption expenses, qualifying emergency expenses or disaster relief, education | Tuition for K-12 education, post-secondary tuition, qualifying education-related expenses (such as textbooks, computers, room and board) |
Bankrate insight
In general, a Roth IRA is best for savers who aren’t sure how much their child will need for college. A 529 plan is better if you need to put away more money at once.
Bottom line
Although the primary purpose of a Roth IRA is to help you save for retirement, you can also use it to save for college. But using Roth IRA funds to cover college expenses has a few drawbacks — for example, using them for education can cut into your retirement savings. Before you use a Roth for education, consider whether using a 529 instead makes more sense for your financial situation. Alternatively, you may decide that using both to save for college is best for your family.
If you are unable to save enough to cover college between a 529 plan and a Roth IRA, investigate federal student loans before taking out a private student loan.
Frequently asked questions
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“Yes, all or part of a Roth may be converted to a 529,” says William Bevins, a certified financial planner (CFP) and certified trust and fiduciary advisor (CTFA) based in Franklin, Tennessee.
Converting a Roth IRA to a 529 requires you to withdraw money from your Roth and use it to fund a 529. But before you do this, you should understand some potential drawbacks.
“The primary reason for building a Roth is to reap the reward of tax-free retirement growth down the road,” says Bevins. “Making early withdrawals can limit the advantage of having one.” Bevins recommends contacting a tax advisor for help determining if this move makes sense for you.
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No, there’s no limit. You can make withdrawals from your Roth at any time. Withdrawing your Roth IRA contributions doesn’t have any tax consequences; however, you might have to pay income taxes on withdrawn earnings.
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