Using a Roth IRA for college: Weighing the pros & cons

As you watch your child grow and explore their interests, your thoughts may turn toward what their future career might be—and the potential college expenses necessary to get them there.

There are a lot of ways you can save up to pay for higher education costs, but one you might not have considered is a Roth IRA. If you've only ever thought about these accounts in terms of retirement savings, here's some insight into the pros and cons of using a Roth IRA to finance your child's education.

A Roth IRA is an individual retirement account that allows you to save for your future in a tax-advantaged way. Contributions to a Roth IRA aren't tax-deductible, but you have the potential to take tax-free withdrawals from the account.¹ This money is typically held for you to use in retirement, but it also can be used to cover qualified higher education costs without incurring the 10% early distribution penalty. Plus, if the money isn't used for college, it still can be held for retirement.

• In 2024, you can contribute up to $7,000 to a Roth IRA if you're under age 50 and up to $8,000 if you're 50 or older.
• In 2025, you can contribute up to $7,000 to a Roth IRA if you're under age 50 and up to $8,000 if you're 50 or older.

Anyone is eligible to contribute to a Roth IRA as long as they're under the income thresholds.

• If you make between the maximum MAGI listed, you can contribute but it will be a reduced amount.
• If you make equal to or more than the maximum limit listed, you can't contribute anything to a Roth IRA.

If you're over the income limit and can't contribute to a Roth IRA in your name, you still may be able to open an account in your child's name as long as they have earned income.

Your Roth contributions come out first when you take a distribution. You can use the contributions to cover higher education expenses without tax or penalty. If there are not sufficient funds from contributions you then could access the Roth IRA earnings. Normally, you would incur a 10% early withdrawal penalty and taxes when you take earnings out of a Roth IRA before turning age 59½ and reaching the five-year holding period.

However, the IRS has several exceptions to the early withdrawal penalty and using a Roth IRA for qualified higher education expenses avoids the penalty. However, the earnings portion of the withdrawal—not the contributions—is still considered taxable income.

Qualified higher education expenses include:

• Tuition and fees
• Books and supplies
• Equipment required for enrollment or attendance
• The cost of special needs services in connection with enrollment or attendance
• Room and board (as long as the student is enrolled at least half time)
  

A Roth IRA can be a useful tool for college savings and helping your child advance toward the career they've envisioned for themselves. However, it's essential to understand the benefits and drawbacks to help you make the right decision for your family and financial circumstances.

If your child decides not to go to college, gets scholarships or doesn't need all the funds in the Roth IRA for education expenses, the account can be kept as a retirement savings vehicle. This gives families more flexibility with their savings while maximizing tax benefits.

Money in a Roth IRA isn't counted when calculating your student aid index (SAI), which determines how much financial aid your student receives. However, you'll eventually have to report withdrawals from the account as your income on the Free Application for Federal Student Aid (FAFSA), so it can impact your SAI two years after you start withdrawing funds.

Roth IRAs typically offer more investment options than other education savings vehicles.

With annual contribution limits for Roth IRAs at a maximum of $8,000 (or $7,000 if you're younger than 50), you may not be able to save enough to cover the total cost of your child's education.

While you can avoid paying an early withdrawal penalty on any distributions used to cover qualified education expenses, you typically have to pay regular income tax on the earnings portion of your withdrawals.

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Explore other college savings options

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Dive deeper

You could, but it's more likely you'd be better off using a Roth IRA to save for education expenses in addition to a 529 plan, which is a special college savings plan sponsored by states, colleges and other institutions. These accounts entice savers with perks that a Roth IRA doesn't provide, such as:

• 529 plans have higher contribution limits. The annual limits for 529 plans are much higher than the contribution limits for a Roth IRA, ranging from around $235,000 to more than $500,000 per beneficiary.

• 529 plans have additional tax benefits. Distributions from a 529 that are used for qualified education expenses won't incur income tax. Plus, many states offer state income tax breaks for 529 contributions.

• 529 plans define "educational use" more broadly. Money in both a Roth IRA and a 529 can be applied toward post-secondary tuition and affiliated costs. However, a 529 also can fund K-12 tuition and be applied to student loans up to certain limits.

But there's at least one key reason to consider putting at least some money in a Roth IRA over a 529 plan:

• 529s are considered in financial aid awards. The FAFSA counts 529 plans owned by the parent or student when determining financial aid eligibility. The contents of a Roth IRA are not.
  

Education costs have been on many parents' minds as they've been rising significantly lately. Many savings options exist, and Roth IRAs are just one that may fit into your financial strategy. If you're unsure which route is best for you, connect with a Thrivent financial advisor. They can help you choose the right mix of accounts and investments to support your goals and family.