Roth IRA, Another Way to Fund Your Child’s College Education.
Most people are at least mildly familiar with a 529 Plan to help fund a child’s college education. There are other ways to accomplish the same thing. These investment tools are slightly more sophisticated. They come with their own positives and negatives and the recommendation that you consult your financial advisor and tax advisor while making your decisions.
The Positives:
• The asset does not appear on the FAFSA, therefore does not impact the Estimated Family Contribution (EFC)
• The investment grows tax deferred and can be withdrawn tax free
• You have complete control of how the money will be invested
• You have complete control of how the money will be used
– There are no restrictions as to the expenses.
– If college expenses are less than the available money, surplus can be used for any purpose.
The Negatives:
• There are very specific rules about when and how the money can be accessed
– If the owner is over age 59.5 and
– If the owner has had a ROTH IRA for more than 5 years,
Then the money can be withdrawn tax free.
– If the owner is under 59.5 or
– The 5 year holding period has not been met
Then the original investment may be withdrawn tax free.
• There are very specific FAFSA impacts when ROTH money is paid to the college
– This money will be considered as an alternate source of income and may negatively impact the next years EFC.
– Possible workarounds:
* Have the student incur loans to pay for college expenses and use the ROTH IRA money to pay
down the loans once college is completed
* Use the Roth money for the senior year expenses
* In either case, no future FAFSA would be required or impacted.
This just touches the surface of how sophisticated some of the college planning may be. It is a clear example of how daunting the college planning process can be. Even with the ROTH IRA as a tool, it takes time for it to be of real value. The premise is that this is a means of saving money over the time the child is growing so that the money would be invested and have a chance to grow enough to both build a nest egg and also grow to cover the expected rate of inflation that will occur while the child is growing.