IRA Rules

Question: Roth IRA – Save for education?

I read online that you can withdraw from a Roth IRA penalty free if the withdrawals are for education expenses for yourself or a valid dependent.
My question is: Why wouldnt I use a Roth IRA to save for my daughter’s education? This way, if she ends up not needing the money, it’s socked away for my retirement?
Am I missing something here? Is there any Roth IRA “fine print” that I’m not aware of?

Answer: It’s true that you can use your Roth IRA to fund your daughter’s college education.

Your original contributions can be withdrawn tax-free and penalty-free at any time for any purpose since you used after-tax dollars to fund your account. So those are always available for your daughter’s education.

It’s the investment gains (earnings) on your account which are subject to income taxes and a 10% early withdrawal penalty if distributed early. However, a higher education exemption helps you avoid the 10% penalty if you take out investment gains to pay for “qualified higher education expenses” at an “eligible educational institution” for yourself, your spouse, children, or grandchildren.

Keep in mind that any investment gains are still subject to income taxes.

However, it’s still a viable option to use your Roth as a college savings plan. It does give you the flexibility to keep those funds for retirement if your daughter never needs them. The obvious drawback here is that if she does need them, that’s less money in your account for retirement. So if you choose this option, make sure you have an alternative retirement savings plan.

This article tackles the advantages and disadvantages of using your Roth IRA as a college savings plan:

http://www.your-roth-IRA.com/roth-IRA-for-college-savings.html

And this article notes the benefits of a Roth IRA relative to a Coverdell ESA and/or state 529 plan:

http://www.fairmark.com/rothira/college.htm

Best wishes as you save for the future, and I hope this helps!

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