Can I Pay for My Children's College With a Roth IRA?
You can pay any expenses you want when you take money out of your Roth IRA. However, you may end up paying extra taxes and penalties if the Internal Revenue Service does not recognize the reason as a qualified exception. Knowing how the IRS will treat a Roth IRA distribution for your child's college helps you make better decisions about how to pay the costs.
Other People Are Reading
-
Qualified Distributions
-
If you meet the criteria to take a qualified distribution, you can remove all the money you want to pay for your child's college education without taxes and penalties. To take a qualified distribution, you must be at least 59 1/2 years old, and you must have made your first contribution to the account at least five tax years earlier. If this applies to you, all you have to do is report the amount of the distribution as a nontaxable distribution on your tax return.
Withdrawing Just Contributions
-
As an after-tax account, your Roth IRA contributions can be withdrawn at any time without incurring taxes or penalties because you received no tax incentive to make the contribution. The IRS also sets the ordering rules so that you can remove all of your contributions without touching the earnings so that you can take out the earnings tax-free and penalty-free. For example, if you have $50,000 of contributions in your Roth IRA, you could take out up to $50,000 without taxes or penalties.
-
No Penalties on Earnings
-
If you must tap into your earnings after first exhausting your contributions to help pay for your children's college costs, the IRS will charge you income taxes on the earnings, but it waives the early withdrawal penalty, which usually adds 10 percent to the cost of the withdrawal. When you file your taxes, file Form 5329 to record the reason -- your child's college costs -- as the reason you do not owe the early withdrawal penalty, and include the earnings as a taxable IRA distribution.
Qualifying College Costs
-
You have to use the money for qualifying college costs so that you can take advantage of the early withdrawal penalty exception. The IRS rules for the exception are more flexible than those of the education tax credits because they allow you to include the cost of room and board, on top of tuition and fees, as long as the student is enrolled at least half-time. Half-time means the student takes at least half the credit hours of a full-time student. For example, if a full-time student takes 16 hours, your child needs to take eight hours to include room and board costs.
-
