Roth IRAs: Education Expenses and Financial Aid

A question that parents frequently ask us is if they can use their Roth IRA to pay for college expenses. Here we review some important facts for parents to consider when using Roth IRA assets for college expenses and how using this account may affect your family’s need-based financial aid eligibility.

Tax Considerations

• When making a Roth IRA distribution, how the assets arrived in the account matters:
  • Roth IRA contributions are withdrawn first and are always tax-free and penalty-free.
  • Roth IRA conversions are withdrawn after contributions. If the account owner is over 59.5 OR the conversion meets the 5-year requirement, the funds withdrawn are tax-free and penalty-free. However, if these requirements are not met and a penalty is owed, distributions used to pay for Qualified Education Expenses receive a penalty waiver.
  • Roth IRA earnings are withdrawn last. If the 5-year requirement and 59.5 age requirement are satisfied, the distribution is considered qualified, and all earnings are withdrawn tax-free and penalty-free. If one of these is requirements is not met, the Roth IRA earnings will be taxable BUT not subject to a tax penalty IF used to pay for Qualified Education Expenses.

Financial Aid Considerations

• Roth IRA assets do not count against your family’s need-based eligibility so spend down non-retirement assets first which do count against your EFC.
• Withdrawing Roth IRA assets will count as non-taxable income on subsequent financial aid forms. The withdrawal will be assessed against your family’s need-based calculations and reduce your eligibility. From this perspective, both an IRA or a Roth IRA distribution is treated as income for financial aid eligibility.

Withdrawing from retirement accounts is something we typically do not recommend unless all other college resources have been exhausted. If you have questions regarding your own college funding situation, please do not hesitate to contact us so that we can help!