Roth individual retirement accounts are designed to help you save for your retirement, but they can also be used for college costs if you’re in a tight spot financially. The Internal Revenue Service allows you to withdraw the money you contributed to your Roth IRA at any time without penalty or taxes. But if you withdraw earnings – which you won’t touch until you’ve taken out all of your contributions, they’re taxable.
If you’re under 59 1/2, the earnings are usually hit with an additional 10 percent early withdrawal penalty. But, qualified higher education expenses allow you to avoid the penalty. Whether you’ve used up all of your loan options, or you don’t want your credit score potentially affected by taking out a student loan, tapping your Roth IRA can provide much-need college funds with a minimal tax hit.
- Request a distribution from your Roth IRA by contacting the financial institution that holds your account. Each financial institution has a slightly different form, but you have to provide your name, identifying information, account number and how much you want to withdraw.
- Spend your distribution on higher education expenses. To qualify for the penalty exception, which saves you the 10 percent additional tax on early distributions of earnings, you must spend it on tuition, required fees, books, supplies and equipment at a college, university or trade school. If the student is enrolled at least half-time, room and board also count as qualifying expenses. You won’t have to submit receipts with your tax return, but you should keep them just in case you get audited.
- Report the distribution on your income taxes. If you took out only contributions, you won’t owe any taxes or penalties and you just have to note the amount withdrawn. But if you took out some of your earnings, too, those earnings count as taxable income. As long as you spent the money on qualified educational expenses, you don’t owe the early withdrawal penalty, but you must fill out Form 5329 to report the withdrawal to the IRS.
Keeping your educational goals on track can be a difficult task, but being able to leverage some of your savings in a flexible way can help keep those goals within reach. Knowing your options can help you decide on the best plan for your needs as they change over time.
This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.
Published by permission from ConsumerInfo.com, Inc., an Experian company. © 2014 ConsumerInfo.com, Inc. All rights reserved.