Roth IRA: Planning for Rising College Tuition Costs

October 4, 2021

College tuition historically rises more than twice the rate of inflation so having a plan to help your kids through college is important. Several accounts can be opened for college funding. One account that I recommend is a Roth IRA. Since you need earned income for the Roth IRA, it would be opened in the parent’s name. For 2021, you can contribute $6,000 or $7,000 if you are age 50 or older. That means that over the course of 18 years, you could add up to $108,000, or $216,000 if you and your spouse both contribute. Here are some pros and cons for using a Roth IRA for college funding: 

Pros: 

– Contributions and earnings grow tax-free. 

– Contributions (but not earnings) can be withdrawn at any time without any tax consequences and penalties. 

– Once you reach 59½, all money can be withdrawn tax and penalty-free to help with children and grandchildren’s expenses. 

– The rest of the Roth IRA money can stay in the Roth to fund your retirement. 

– If you don’t end up needing college funding, then your retirement assets grow. 

Cons: 

– The annual contribution is low compared to what you can contribute to a 529 plan. 

– There is no income tax deduction for Roth contributions. 

– Roth withdrawals count as income for financial aid purposes and can affect how much aid will be offered. 

– Using Roth money to fund education will cut retirement savings, and Roth savings come tax-free when you withdraw them, with no required minimum distributions. 

 If you are under the age of 59½ when you need to fund your child’s college, withdrawals of earnings will be subject to income taxes, but not an early withdrawal penalty, as long as the cash is used for college expenses. If you are thinking about starting a college fund for your child, give me a call at (520) 544-4909, and we can discuss which account best fits your financial plan.