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When It Makes Sense To Save for College Through a Roth IRA

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Apr. 1 2022, Published 5:10 a.m. ET

Roth IRAs are popular retirement savings plans, but they can also be used to build an education fund for yourself or your child. Is a Roth IRA good for college savings?

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College costs are on the rise, pushing more people toward student loans to fund their college education. As a result, people's debt burden is getting heavier than ever. Setting aside some money for college expenses can help avoid student debt trouble. One way to do that is through a retirement account, such as an IRA.

How does an Roth IRA work?

There are two types of IRA plans: traditional IRAs and Roth IRAs. The major difference is in their tax treatment. With a traditional IRA, you contribute a portion of your earnings to the plan before taxes, meaning you’ll need to pay taxes when taking distributions. On the other hand, a Roth IRA requires you to make an after-tax contribution to the plan, so you don't pay taxes on the distribution.

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Both plans have annual savings limits, with people nearing retirement having more savings space. IRA savings are intended to grow over time. Your plan will put the funds toward a variety of investments, such as mutual funds, stocks, or cryptocurrency. Roth IRAs are also more flexible, allowing you to tap into the money you put there without heavy tax implications,

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Is a Roth IRA good for college savings?

When it comes to saving for college, 529 plans are the more popular option, and they're the best route if you’re sure you’ll use the money you’re setting aside to cover education expenses. They also offer great tax benefits. However, if you’re not so sure you’ll use the savings for education expenses (or if there's a risk your child will drop out of college), you may want to go with a Roth IRA. It’s more flexible and also offers advantages and tax benefits.

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The Roth IRA plan also makes it easy to split your savings between college and retirement. You can take a portion of your contribution to the plan at any time to pay for college costs without facing early withdrawal penalties. A major drawback of mixing retirement and college savings in a Roth IRA is that you may end up with less money than you need in retirement. (As contributions to the plan are subject to limits, college savings may use up the space you need to save for retirement.)

It’s important to carefully weigh your options to determine the best way to save for college. Your research will pay off.

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