Broker Check


November 20, 2017
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In my experience, most of our clients tend to use a 529 college savings account to save and invest for their kid’s college. It is easy, can provide a tax deduction in some states, and has other benefits (like multiple contributors) that often make it the best choice.

However, lately I have received lots of questions about using a Roth IRA as a means to save and invest for college. A Roth IRA is a terrific method to save for retirement… but for college? Well, in some cases, yes.

Like a 529 in California, Roth IRA contributions receive no tax-deduction, but they can grow tax deferred and can be withdrawn without penalty to pay for qualified educational expenses. One benefit of of using a Roth IRA instead of a 529 for college savings is that if your student doesn’t go to college, it can remain in your account and be used to supplement your income when you decide to retire. It is important to remember, though, that 529 accounts can be used for multiple family members as well, so the “dual purpose” element of the Roth IRA is good, but not the whole story.

So, why wouldn’t you use a Roth IRA to save for your child’s college expenses? In short, there are many more restrictions that make it harder to use. First, contributions to a Roth IRA must come from only one person, and it must be done with their “earned” income. This can sometimes eliminate the gift contributions that grandparents and other family members like to make from time to time. Second, the contribution limits are much lower in a Roth IRA than they are in a 529 (only $5,500 if you are under 50), so you won’t be able to save as much in a year. Finally, if you are single and make more than $133,000 a year or more, or are married and make $196,000 a year or more, you won’t be able to contribute to a Roth IRA at all.

I tend to prefer the 529 college savings accounts because of the higher contribution limits (there is an overall maximum account balance limit of $475,000), the ability of several people/family members to contribute to the same account, and because it doesn’t interfere with important “space” in a person’s retirement savings plan.  Also if the money is used for higher education, 529 plans allow for tax-free withdrawal of earnings before you are age 59 and a half, whereas your Roth IRA earnings would be taxed.

Also, keep in mind that withdrawals from a Roth IRA will count as income on the FAFSA application, even if it is not taxed as income. This will have a larger impact on aid than 529 assets for your child, which means that Roth IRA withdrawals should really be used to fund the last year(s) of college.

I think that using a Roth IRA to save for college is generally attractive for people who are concerned their kids won’t go to college, because the back-up plan is that the money could be used to fund retirement. However, in the case where at least one kids will certainly go to college or beyond, the 529 is the better option.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.

The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws are subject to change.