Roth IRAs For College Saving

Added March 2, 2009 by Ilyce R. Glink

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Summary: You can use your 401K retirement plan to help save for college by rolling the money into a Roth IRA. The money in a Roth IRA grows tax free and you are able to withdraw your earnings after five years to pay for tuition expenses. A Roth IRA is also a good way to save for college because it keeps the money in your control.

Q: I have a 401k from my former employer that I need to make a decision about. Is there any way I can roll over the entire amount into something that I can then apply to my daughter's college tuition without taking a tax penalty?

A: You can probably escape the penalty, but you'll have to pay taxes on the cash. You can roll your 401(k) into a self-directed IRA. If you qualify for a Roth IRA, you can roll over the amount into a ROTH. But you will have to pay taxes at your current tax rate on the money. Once the cash is in the ROTH, you should be able to use it to pay college tuition. Please talk to a CPA to make sure you can qualify for this.

Q: You made a comment about a Roth IRA that I have heard twice now but can not find in writing. If you have a Roth IRA over 5 years can you withdraw that money and use it for a college education? I have 2 children, 7 and 3, and if I were to open a Roth IRA in my name today to save for their education it would certainly be used more than 5 years from now. So 2 questions: 1) Can you use Roth IRA savings for college? 2) How does this plan for savings for kids college compare and contrast to the 529b plans that Clark so frequently endorses?

A: You can use a Roth IRA to save for your children's college education and it's valuable in a number of ways. First, the money grows tax-free. Second, you may withdraw your contributions at any time, but you may also withdraw your earnings after five years to pay for medical or tuition expenses. Because a Roth is a retirement vehicle, it does not count when factoring in college aid monies.

I think the 529 plans are good, too. Remember, with a Roth, you're limited to $2,000 per year which may or may not be enough. If you can, do both.

Q: Which investment plan would you recommend for saving for college? Are there better plans than 529 plans or Roth IRAs?

My kids are 12 & 14, in 7th & 8th grade.

A: Any plan that gets you to save money is worthwhile. A 529 plan is good, but you don't have a lot of time to save because your kids are already 4 and 6 years away from college. The Roth IRA is good because it keeps the money in your control. I'd look into prepaid tuition plans, especially if the 14-year old has an idea of where he/she wants to go.

Finally, your kids can borrow for college. No one will lend you a dime for your retirement. So if you aren't already maxing out your retirement plans, that should be your priority.

Jan. 1, 2005

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