How to Use Roth IRA for College
A Roth Individual Retirement Account (IRA) is designed to save money, designating it for retirement income supplementation. Contributions for Roth IRAs are not deducted from income, but receive the benefit of tax-free distributions when certain conditions are met. Qualified tax-free distributions are taken after the IRA owner reaches age 59 1/2 and has held the IRA for at least five years. The Internal Revenue Service (IRS) allows exceptions for early distribution penalties, one being college tuition. Some taxes may apply when using a Roth IRA for college costs.
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Instructions
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Look at which of your family members have a Roth IRA and would consider using it for the student's college funding. Parents and grandparents are both eligible to use Roth IRAs. Students who have held jobs may also have a Roth IRA that qualifies.
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Pick one of the IRAs that meets most needs. Grandparents may already be 59 1/2 and have held the IRA for at least 5 years, whereas parents may only have held the IRA for five years. A student's Roth IRA is not likely to meet both guidelines but if parents and grandparents need all Roth assets, the student would pick a personal IRA.
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Call the college bursar's office and get the exact amount needed for tuition and dorm expenses.
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Call the Roth IRA custodian and request a distribution form. Explain the use of the funds in case the custodian uses a different form for IRS exceptions.
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Fill the form out, marking "college tuition exception" in the appropriate box with the exact amount needed. Request a "net amount" to get the required funds after any tax withholding. The exception prevents a 10 percent tax penalty for early distribution but if the IRA has not met the five year holding mark or the owner is not yet 59 1/2, income taxes will apply to the distribution.
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Sign and submit the form. Obtain the check and cash it, using the money to pay the college expenses.
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Keep a copy of the distributions form, registration letters and receipts to the bursar's office. An IRS Form 1099-R is issued in January the year following the distribution. A distribution properly coded with an exception has Code 2 in Box 7; "early distribution, exception applies." Request a correction if this box has any other code in it.
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Tips & Warnings
Distributions may be taken in one-lump sum or as monthly payments if the school accepts them.
