Rules for High School Education & Grandparents on a Roth IRA
Many grandparents are eager to help their grandchildren with educational expenses, which can start adding up well before college. If the grandkids attend private high school, tuition can run into tens of thousands of dollars, particularly in pricey cities like New York or at prestigious boarding schools. If you have grandchildren in private school and you want to tap into your Roth Individual Retirement Account to help them pay for it, be aware of your options.
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Normal Distributions
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Because contributions to a Roth IRA are made with after-tax dollars, you can withdraw them at any time without penalty or taxes. When you reach age 59 ½, you can also withdraw the earnings portion of your investment penalty-free; if you’ve owned the account for more than five years, the earnings are tax-free as well. This is a normal distribution and you can use the money any way you want, including for high school tuition for your grandchildren. If your account is less than five years old, you may have to pay regular income tax on the earnings.
Early Withdrawals
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If you’re younger than 59 ½ and you decide to take an early withdrawal from your Roth IRA to pay high school expenses, you’ll owe a penalty of 10 percent and income tax on the earnings portion of the withdrawal. You won’t be able to take advantage of an exception to the early-withdrawal rules that the IRS allows for educational expenses, because the exception applies only to higher education; high school expenses don’t qualify.
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Uniform Transfers to Minors Act
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There are other ways to save for a private high school education. Think about setting up a Uniform Transfers to Minors Act account with your grandchild as beneficiary. An UTMA account is a custodial savings account with no contribution limits. The custodian can withdraw money from the account for high school education expenses or for any other reason that benefits the child. When the beneficiary reaches 18 or 21, depending on state law, he assumes control of the account and can use the funds any way he wants.
Coverdell Education Savings Account
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Another option, at least through 2012, is the Coverdell Education Savings Account. This account was called an Education IRA until 2001, but it was never really a retirement plan. The Coverdell is a tax-deferred savings vehicle that allows you to withdraw funds without penalty for education expenses. The current rules include not only higher education but also elementary and secondary education. However, they are set to expire after 2012 unless Congress extends them or makes them permanent.
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References
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