Home > Financial Aid > College Savings Accounts > The Roth Ira Students With Retirement Plans

The Roth IRA

Students with Retirement Plans

A retirement plan…for college? You may be surprised to find that the Roth Individual Retirement Account (IRA) is one of the best options for putting college money aside—even if a parent is nowhere near retirement. Roth IRAs are a good option for parents interested in opening up a college savings account. They are an even better idea for those interested in setting aside money for both college and retirement.

As you probably figured, larger accounts have greater earning potential. A 5% interest rate on $100 is greater than a 5% interest rate on $50. This is why combination accounts such as the Roth may yield greater profits than separate accounts. If a parent is worried about using up their retirement funds for a college education, a separate account is always an option.

Although Roth IRA deposits are not tax-deductible (the amount you deposit each year must be recorded as income on your tax return), they do grow tax-free. They may also be withdrawn tax-free under certain conditions. Five years after the account is opened, the deposited sum may be withdrawn without penalty or tax charges. A withdrawal of the earnings from that deposit will be taxed. Before the five-year mark, withdrawals will be penalized by 10% unless they are used for qualifying expenses; luckily, education is one of them.

Money used for an education may be taken out of an IRA without a penalty charge. Unfortunately, any profits made from your deposit will be taxed. Let’s say, for example, a parent has contributed $5,000 to their Roth IRA. After four years, the money has grown to $7,000. Although the 5 year mark has not passed, the parent can take out money to pay for qualified education expenses without having to pay a penalty. The parent may take out $5,000 dollars and not worry about taxes. Any additional withdrawals will be taxed (but not charged a penalty fee).

One of the best parts of the Roth IRA is that, unlike the 529 and Coverdell, account money may be used for more than just an education—after 5 years. Even young depositors can appreciate the idea of having leftover money,money that can grow tax-free, money that allows for greater spending freedom.

Once a student graduates, they can also take advantage of the first-time homeowner rule to take out tax-free funds. Money from the Roth IRA can be withdrawn, tax and penalty free, before the age of 59.5 if it is to be used for the purchase of a first home. While the average graduate is likely to wait a few years before purchasing property, the prospect of tax-free savings is there for the taking.

One must keep in mind that there are restrictions, as with the 529 and the Coverdell, on penalty-free goods bought with money withdrawn before five years. Also, in order to avoid the penalty, the amount of money used for an education must not exceed the costs needed for attendance. If tuition, fees, and books only amount to $3,000, you may only take out this amount.

Roth IRA accounts may be one of the best options for those with college and retirement savings needs. Older parents are most likely to profit from this plan. Once one reaches the age of 59.5, they may take out their savings, both tax-free and penalty-free, and use them for whatever they need. At that point, charges for money not spent on tuition may get a bit irritating.

For more information on the Roth IRA, you may visit: http://www.irs.gov/retirement/article/0,,id=137307,00.html

Latest College & Financial Aid News

80 Percent of College Students Drink

July 31, 2015

by Chris Bernardi

The disease of addiction has ravaged college campuses, evident by the fact that 80 percent of college students drink alcohol, 40 percent binge drink. College students make up one of the largest groups of drug abusers nationwide. Young adolescent’s ages 18-24 already have an increased risk of addiction- those enrolled in a full-time college program are twice as likely to abuse drugs and [...]

Jobs During College

July 30, 2015

by Ashley Grego

While some students are fortunate with affluent upbringings, others have had jobs since the day they were legally allowed to join the work force. Even with a heavy course load, some of these students still have to work. Typically, three types of jobs are common during college: work-study, on-campus and off-campus. Work-study is an on-campus job usually open to students with [...]

Not Shaving Earns Extra Credit at ASU

July 30, 2015

by Susan Dutca

What better way to defy social norms and gender expectations while earning extra credit than by refusing to shave for ten weeks? Female students at Arizona State University are putting public opinion to the test as they refrain from shaving their legs and armpits. To avoid any sexism, males are also permitted to participate, and must shave all body hair from the neck down. Women and Gender [...]

Follow Us:

facebook twitter rss feed