Using a Roth IRA to pay for education: Rules and guidelines

At a glance

• A Roth IRA is a retirement savings account that allows you to invest after-tax dollars and withdraw money tax-free in retirement. It’s possible to use this money as college savings, but there are rules to know.
• If a Roth IRA withdrawal happens before age 59½, you’ll pay a 10% penalty in addition to income taxes on the amount withdrawn.
• Before withdrawing from a Roth IRA, check your fill out a FAFSA to check your financial aid eligibility and apply for Federal Student Aid, scholarships and grants. 
• Curious about how you can save on your degree? Use the Savings Explorer^® tool to discover what you may be eligible for at University of Phoenix!

When it comes to a college savings plan, many options are available. Grants and scholarships are typically the first sources of financial aid that college students seek to cover education expenses. After that, federal student loans, tuition assistance programs and other private financing options are other options to pay college expenses often worth exploring.

However, there is another possible source of funding for college-bound beneficiaries — a Roth IRA. This option is viable, but there are a few rules and guidelines you should first be aware of.

This article is not intended to serve as financial advice. All financial decisions, including investments, should be made carefully and potentially with the guidance of a financial planning professional.

What is a Roth IRA?

A Roth IRA is a tax-advantaged retirement savings account that allows you to invest after-tax dollars and withdraw money tax-free in retirement. A few key things to know:

• Investing in a Roth IRA can be beneficial when you assume your tax rate will be higher later in life.
• The tax-free contribution limits are based on the age and income of the account owner and are revised annually. For example, in 2023, the deductible limit grew to $6,500, with an extra $1,000 for those 50 and over. The previous year saw a contribution cap of $6,000, but it was raised to $7,000 if the contributor was age 50 or above.
• Countless banks, financial institutions and brokerage firms provide Roth IRA savings plans.

Unlike a traditional IRA, Roth IRAs are retirement savings plans funded with post-tax contributions, so any qualified distributions taken after age 59½ aren’t subject to income taxes from the Internal Revenue Service. This means earnings from investments can be withdrawn tax-free as long as the account has been open for at least five years. Moreover, a Roth IRA can be funded from a variety of sources, including:

• Transfers — A Roth IRA transfer is a transaction that moves Roth IRA contributions from one retirement account to another, such as an employer IRA plan.
• Conversions — A Roth IRA conversion would look like transferring retirement funds from a traditional-type IRA or 401(k) into the Roth IRA account.
• Regular contributions — This is the standard and consistent payment you would make to your Roth IRA over time.
• Rollover contributions — Rollover contributions are after-tax Roth IRA contributions. It’s possible to place the full distribution (including pre-tax amounts) and roll them over to your Roth IRA account.
• Spousal IRA contributions — The spousal IRA is an IRS rule that allows a partner without income to fund an individual retirement plan.

Withdrawing from an IRA to pay for educational expenses

Generally speaking, money saved in an IRA can be used for any purpose — including college savings. However, if the withdrawal happens before the account owner reaches age 59½, they’ll pay a 10% penalty in addition to income taxes on the amount withdrawn.

Roth IRA withdrawal for educational expenses

Since contributions would have already been taxed, withdrawals from these plans generally don’t count as taxable income.

An exception to this is the “five-year rule," which makes withdrawals of earnings above the principal amount taxable when the IRA is less than five years old.

Traditional IRA withdrawal for higher education

Using money from a traditional IRA for college savings is also possible, but it is subject to different rules. For example, the money invested can accumulate without being taxed until it’s withdrawn. However, ordinary income tax applies after withdrawals are taken, and distributions must begin after age 73.

This type of retirement account has an added benefit: There are no restrictions concerning how much money one earns to open the account. This makes it ideal for those who believe they will be in the same or a lower tax bracket later in life.

However, even though the 10% withdrawal tax is waived for qualified expenses such as education, paying income tax on the money withdrawn from a traditional IRA is still necessary. This means you will have to pay taxes on the amount of your withdrawal plus any accrued earnings since its deposit. 

Should I withdraw from an IRA to pay for college expenses?

Withdrawing from a retirement account to pay for college education and other non-retirement expenses may be tempting, but there are a few things to consider before making this decision, such as:

• How much money can be withdrawn? Because of the 10% early withdrawal penalty, taking more than you need may not be a wise choice.
• What are the tax implications? Any money withdrawn from an IRA will count as taxable income, so it’s essential to consider how that might affect your overall tax burden.
• Will the withdrawal trigger a tax penalty? Depending on the type of IRA, taking out money before age 59½ may trigger a penalty.
• What are the long-term implications of withdrawing money from an IRA? Taking money out now could mean you’ll have less saved down the line.

In addition to these considerations, it’s important to remember that an IRA is intended for retirement planning and savings and should be used wisely. Taking out funds for education expenses can delay your retirement goals, so it’s best to make sure you explore other financial aid options first, such as:

• Pell Grants
• Need-Based Scholarships
• Student loans

Ultimately, with so much to consider before taking money out of an IRA for education expenses, it’s necessary to do your due diligence—perhaps even consult a financial advisor—on the best course of action. This way, you can make sure you’re making informed decisions about your college savings plan that minimally impact or don’t affect your long-term financial goals.