🤔Does it make sense to pay for college with a Roth IRA?

With interest rates at their highest levels in decades, and the price of college continually skyrocketing, this is a question that we’ve fielded from clients lately. Could paying for college via a Roth IRA vs taking out loans be worthwhile?

For those that don’t know, a Roth IRA is a retirement savings account that is funded with after-tax dollars. Unlike a Traditional IRA or Traditional 401(k), you don’t receive a tax deduction on your contributions. The difference to a Roth IRA however is that distributions may come out tax free. This has inspired some to question if this makes a Roth IRA a solid college funding tool, in addition to it’s benefits for retirement savings.

Let’s break it down:

The advantages to using a Roth for funding college:

1. Roth IRAs offer flexibility – You’re eligible to take out your contributions to a Roth IRA anytime without any tax penalty. The earnings? Not so much. Depending on your age and the length of time that the account has been opened, and a few other exceptions, these may be subject to taxation a 10% penalty
2. Tax free withdrawals – When talking about withdrawing your contributions, this is money that can be withdrawn tax free towards the cost of college. The same is not true for withdrawals from other investment accounts such as taxable accounts or traditional retirement accounts
3. Assisting with cash flow in the short term – When paying for college, cash flow is king! With loans come loan payments, something that will further reduce your ability to make tuition payments

Why you may want to think twice before using a Roth to pay for college:

1. Depleting a retirement asset – The power of a Roth IRA as a retirement asset is the continued tax-deferred growth and tax-free withdrawals. When not touched for college, these accounts can continue to compound and provide the growth that most individuals need for retirement. Withdrawals not only deplete the balance, but they also reduce future compounding if invested.
2. You can’t take out a loan for retirement – It’s a common saying from financial service professionals but there is truth to it. When left with a retirement shortfall, too often your options are limited to either working longer or cutting your expenses in retirement. Neither is ideal, and liquidating retirement assets for college make the uphill battle for retirement even more challenging
3. Long term tax rates – It hasn’t been much of the talk since rates were adjusted with the 2017 Tax Cuts and Jobs Act, however the current lower tax rates are set to sunset in 2026. Long term, it’s hard to see tax rates lower than where they are today. This provides even more value to the Roth IRA as a retirement asset: for it’s ability to provide tax free income later in life

Like most things in finance, there’s no right answer to whether a Roth IRA is the best fit to assist with paying for college. However, as you can see, the Roth IRA is an often-overlooked retirement asset that, if depleted before retirement, can make funding retirement down the road all the more difficult.

Questions about whether a Roth IRA is the best way to pay for your child’s college? Feel free to reach out to start the conversation.

All the best,

Andrew Holmes, Certified College Planning Specialist™

Andrew@PlanWithFPS.com

617-630-4978

Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.