Using the Roth IRA for College

by Joe on April 23, 2012

Dave asks, “What are the pros and cons of using Roth IRAs to save for your children’s college (as opposed to 529 plans)?”

Let’s start with the positives –

  • Withdrawal of principal (always) and growth (if held to age 59-1/2) is tax free regardless of how spent.
  • 529 choices are limited and can be expensive compared to the IRA alternatives.
  • If not used for college, the Roth can go about its business, being a retirement account, the 529 growth is taxed and penalized on withdrawal.
  • Money in a Roth may have less of a negative impact on financial aid than the 529 account.

The negatives –

  • Given the limits of IRAs,  $5000 or $6000 if 50 or over, this money may not be enough to fully fund one’s college savings.
  • A number of states (34 to be exact) offer a benefit for deposits to a 529 account, the Roth is purely a post tax account.

Thanks, Dave for another excellent question. If readers have additional pros or cons to this strategy, I’d love to add them to the list above.



{ 2 comments… read them below or add one }

Brian St. Pierre April 23, 2012 at 9:16 am

Don’t forget that the limit is $5000 *for each parent*, and if the child has income, there’s up to another $5000. If you put $10k/year in a Roth when the kid is in first grade, that’s $120k in contributions by the time college rolls around. At an average return of, say, 5%, the account would be worth $165k when withdrawals start.


joe April 23, 2012 at 9:29 am

Great point, if both parents don’t need to use the IRA for their own savings. With your example, there’s $45K worth of growth that wont be subject to any tax, if the favored cap gain rate rises to even 20%, this is nearly $10K saved via this strategy. Thanks for the comment!


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