Can a Roth IRA be used for college?
Is a Roth IRA an effective way to save for and pay for college expenses? At least one aspect of a Roth account—the ability to tap into principal at any time, tax free¹—could make it a useful option for covering educational costs. Here’s a quick look at how these accounts work, how they compare to 529 plans, and when it might make sense to choose one.
How a Roth IRA can help with goals beyond retirement
The general idea of a Roth IRA is that you put in after-tax dollars, your contributions have the chance to grow over years or decades, and then provided your account has been established for at least five years, you can make withdrawals at age 59½ or later without paying any additional taxes.2
But there’s something special about a Roth IRA that can make it a helpful option in pursuing college savings goals: You can withdraw your principal, with no taxes due, at any age.
Included in your Roth IRA principal are:
- The total amount you contribute directly to your account
- Any amount you rolled into your Roth IRA from another IRA or an old 401(k) account
Not only can you withdraw this money at any time, but you can use it for anything—including educational expenses.
How Roth IRAs compare to 529 plans
Because people may save for college using a Roth IRA as a supplement or alternative to a 529 plan, it’s helpful to understand the differences between these two options.
For starters, Roth IRAs have strict contribution limits, which 529 accounts don't. Both accounts allow for tax-free withdrawals—but you must be mindful of their rules. And the investment choices tend be different, with an emphasis toward retirement in Roth IRAs and educational funding needs in 529s.
Most notably, a 529 is intended to be spent entirely on educational expenses—while the Roth IRA can be partially used for that purpose but continues to help you contribute to retirement during and after your kids’ college years.
Comparing rules and benefits—Roth IRA vs. 529 plan
Roth IRA |
529 plan |
|
Primary purpose |
Tax-free growth for retirement—and access to principal for other important needs |
Tax-free growth when used for qualified educational expenses |
Who's eligible to open and contribute to an account? |
Eligibility is based on earnings
For single filers: Full contribution allowed with modified adjusted gross income (MAGI) up to $138,000 in 2023, phased out at $153,000
For those married and filing jointly: Full contribution allowed with MAGI up to $218,000 in 2023, phasing out at $228,000
|
No restrictions based on earnings |
How much can you put in? |
Yearly contribution limits depend on your income—up to a $6,500 regular contribution and $1,000 catch-up contribution (for those 50 and older) in 2023 |
Contribution limits depend on the 529 plan, with many limits in excess of $500,000 |
What kind of money can you put in? |
After tax |
After tax—although many states provide a tax deduction or credit for residents who save through their own state’s 529 plan or, in some cases, any state’s plan |
Investment options |
Depends on the provider but can include mutual funds in various asset classes, target-date funds, managed accounts, individual stocks and bonds, and alternative investments |
Depends on the plan you choose but usually includes age-based or enrollment-based portfolios, as well as various stand-alone mutual funds and other investment options |
Taxes on withdrawals |
No taxes due at any age for withdrawing from your account’s principal. Interest and investment earnings can be withdrawn tax free if you’ve had your account for five years or more and are least age 59½
Note: Early distribution of account earnings for qualified educational expenses are taxable as income but aren’t subject to the 10% federal tax penalty |
Tax-free withdrawals for qualified educational expenses as defined by the IRS. Withdrawals used for other purposes are subject to taxes and a 10% federal income-tax penalty on earnings |
An early start is key
While the total cost of a college education can easily run to more than five figures the amount you’re allowed to save in a Roth IRA is limited, whereas in a 529 plan, your contribution limit is much higher.
The 2023 limit for Roth IRA contributions is $6,500 and it tapers down to zero for individuals earning over $153,000 and couples making more than $228,000.
Even more important, money can be tight. That’s another reason you may want to start when—or even before—your child arrives, to give you years to potentially build up your principal and pursue tax-free growth.
Should you consider a Roth IRA as an option for college savings?
It depends on your financial situation and larger objectives.
While you’ll be able to tap your Roth account’s principal to pay college bills, you may pay taxes and penalties if you try to use the earnings. That said, if a Roth makes sense as part of your retirement saving strategy, you may want to consider earmarking part of your principal for educational costs.
Another option to consider is to use both a Roth IRA and a 529 plan. This lets you tap into the potential advantages of each vehicle—while taking into account the various saving, withdrawal, and spending limits. Your financial professional can help you sort it all out.
1 Distributions from Roth accounts must be “qualified” for both the contributions and earnings to be treated as tax free. Certain conditions would apply. See your plan document for more details. All references to tax-free treatment of qualified distributions are intended to refer to the treatment of such distributions at the federal level only. You may want to consult a professional tax advisor regarding any tax issues discussed. 2 A qualified distribution from a designated Roth account in the plan is a payment made after the participant attains age 59½ (or after death or disability) and after the designated Roth account in the plan has been established for at least five years. In general, in applying the five-year rule, count from January 1 of the year the first contribution was made to the designated Roth account. Participants should contact their plan consultant or financial or tax advisor for specific details on the five-year rule and whether any special rule may apply.
Important disclosures
There is no guarantee that any investment strategy will achieve its objectives
529 PLANS ARE NOT FDIC INSURED, MAY LOSE VALUE, AND ARE NOT BANK OR STATE GUARANTEED
In this document, all tax disclosures regarding Roth 401(k) contributions are limited to the federal income-tax code and, in particular, all references to tax-free treatment of qualified distributions are intended to refer to the treatment of such distributions at the federal level only
The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made.
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