A Roth IRA is a versatile retirement account that can help you fund your golden years. While early withdrawals are often discouraged, the IRS will make an exception for a Roth IRA withdrawal for education expenses.

This exception makes Roth IRAs popular alternatives to 529 Education Savings Accounts (ESA) to save up money for college or any qualified education expenses. However, not every educational expense is qualified and there are benefits and drawbacks to using a Roth IRA this way, especially when compared to an ESA.

We’ll outline what expenses are typically considered “qualified” and what you should know before you use your Roth IRA for educational expenses for you or a loved one.

The Benefits of Using a Roth IRA for Education Expenses

Can A Roth IRA Be Used for Education Expenses?

Yes, a Roth IRA can be used to pay for education expenses for you or your spouse, child or grandchild. Qualified education expenses represent one of several circumstances that allow for penalty-free withdrawals from Roth IRAs and other retirement accounts.

The expenses must be related to at least half-time enrollment at an eligible college, university, or related educational institution.

Some examples of qualified expenses include:

  • Tuition and fees
  • Books and supplies
  • Required equipment, such as laptops
  • Student activity fees
  • Room and board if the student is enrolled at least half-time

When you invest in tax liens, earnings come from the interest applied to the lien


5 Benefits of Using a Roth IRA for Education Expenses

Roth IRAs can be incredible savings vehicles for parents who want to save up for college and also their retirement simultaneously. Check out some of the benefits of using a Roth IRA for qualified education expenses.

1. Education-Related Expenses Aren’t Penalized

Unless you’re over the age of 59 ½, withdrawals from your Roth IRA earnings are typically subject to a 10% penalty.  That’s not the case for educational expenses like those listed above. As such, you can withdraw without worry, tapping into money you’ve saved and the compound interest it earned.

2. Roth IRAs Encourage Tax-Free Growth

Roth IRAs are funded with after-tax dollars and grow tax-free in the account. This means that you can earn money on top of existing contributions inside of the stock market or an alternative asset (self-directed IRAs only) while using said contributions as qualified withdrawals for education expenses in the future.

This fact alone makes Roth IRAs a promising savings mechanism that allows for more pronounced, tax-free growth compared to other financial vehicles, such as a basic savings account.

3. Roth Contributions Can Be Invested for Higher Earnings

When you contribute to a standard Roth IRA, you have some control over how your funds are invested. If you know you may want to tap into your Roth IRA for a child’s or grandchild’s educational expenses, you can choose an investment strategy that matches your expected timeline.

You can further enhance your earning potential by opening a self-directed Roth IRA, which allows you to invest in alternative assets, such as real estate, cryptocurrency and mortgage notes. Depending on your alternative asset, you may see faster and more substantial returns than when funds are left in common assets, such as stocks, bonds and mutual funds.

4. Students Can Take Less Money from Student Loans

Student loans can weigh you or your child down for years, and private student loans have fewer relief mechanisms when compared to federal loans. Leveraging Roth IRA funds to pay for academic expenses can eliminate or reduce the need for student loans. And, since your educational expenses are qualified withdrawals and Roth IRA withdrawals are tax-free, you can save money by avoiding lofty, long-term interest rates.

5. Roth IRAs Encourage Continual Savings After School Ends

A Roth IRA doesn’t expire or close just because you withdraw funds. That means you, your spouse, or your child/grandchild can continue contributing to and benefiting from the Roth IRA well into retirement. And, if academic expenses are lower than the accumulated value of the Roth account, the remaining funds will continue to grow tax-free and benefit from compound interest, setting you or a loved one up for a financially sound retirement.

How Do Roth IRA Distributions Impact Financial Aid?

Roth distributions can affect financial aid eligibility in the year after they are made. While simply having a Roth account won’t affect eligibility, the distributions will be listed as income on the Free Application for Federal Student Aid (FAFSA) form. As such, the distribution may reduce eligibility for the following year.

Speaking to a financial expert can help you understand how a withdrawal may affect financial aid the following year.

Should I Choose a Roth IRA or 529 Plan for My Child’s Education?

A 529 ESA and Roth IRA are the two most popular financial vehicles to save for your child’s college tuition. Funds from either account can help you offset the cost of your child’s education, but depending on your circumstances, one may be more suitable. Let’s compare.

Pros and Cons of a Roth IRA

A Roth IRA can be a good option if you aren’t sure your child will go to school but still want to save for their future. Funds that remain in the account after they finish schooling or choose an alternative path can stay in the account, giving them a head start on retirement savings.

Both Roth and 529 Plans have annual contribution limits, though the language and implications around them are structured differently. However, the standard yearly IRA contribution limit is lower than the annual gift tax exclusion limit applied to a 529. Depending on your income and marital status (presuming the account is in your name), your Roth IRA contribution limit can be lowered or entirely phased out.

Additionally, students can avoid any tax penalty as long as the amount withdrawn is lower than the qualified expenses paid.

However, tapping into a retirement account can be risky, mainly if it’s your only account. Any amount withdrawn reduces the benefit of compound interest. And, since Roth IRA contributions are limited, it may be challenging to replace funds in a timely manner.

Pros and Cons of a 529 Plan

A 529 Plan offers a way to save exclusively for education-related expenses. It can be used to cover the cost of college or university tuition, trade school tuition, or apprenticeship expenses. It can also cover private elementary and high school tuition.

As indicated above, 529 Plans also allow for higher annual contributions, which can be beneficial, especially if you want to save for more than one child to attend school. Roth IRAs have a single contribution limit whether you have one of multiple accounts designated for retirement and education purposes.

Beyond that, a 529 plan allows others, such as aunts, uncles or grandparents, to contribute directly to your child’s education.

Coverdell ESAs offer more flexibility, letting parents invest in a wider range of assets to save for their child’s education.

However, 529 Plan funds can only be used for academic expenses. If your child uses funds for non-IRS-approved costs, they’ll face a 10% penalty. As such, if you don’t know if your child will attend an institute of higher learning, you may want to consider a Roth IRA. However, it should be noted that you can change the beneficiary of a 529 plan.

Which Account Is Right for Me?

Choosing an ESA or Roth IRA depends on several factors, including the level of education you plan to fund, what you plan to do with the money outside of schooling, and income limits. Overall, a Roth IRA is a great way to save up money for qualifying education expenses, as well as retirement post-college.

FAQs

Is there an age limit for using Roth IRA funds for education expenses?

No, there is no age limit for using Roth IRA funds to pay for qualified educational expenses. That means you can leverage those funds to pay for your academic advancement at any time, even if it’s well into your adult life.

Can Roth IRA funds be used for both higher education and K-12 expenses?

No. Roth IRA funds can only be used for qualifying higher education expenses like tuition. The early withdrawal exception does not apply to K-12 expenses. If you are using a Roth IRA for K-12 expenses and you’re under 59 ½, any withdrawal from earnings will be penalized. However, unlike traditional IRAs, you can withdraw from Roth IRA contributions at any time without penalty.