Can I liquidate my Roth IRA to pay for my daughter's upcoming college tuition?
I recently liquidated my Roth IRA in anticipation of the tuition bill for my daughter who will start college this fall. I am 53 years old. I understand I can use up to $10K without penalty as an unqualified distribution. I also understand that I have 60 days to put the remainder into a new Roth IRA at a different institution as a rollover. If I follow these guidelines, can I distribute my Roth IRA to pay for her tuition?
Legally you can do almost anything you want to do. I will rephrase your question to ask whether it is prudent, rather than whether it is legal. It is not prudent to liquidate a Roth IRA, which takes a lifetime to build and only a few seconds to destroy. You are permitted once a year to take money out of a Roth (or any retirement account) and then to replace it within 60 days, but you should save that situation for a true emergency such as your dying on the emergency-room table rather than a college tuition bill which you have known about in advance for about 18 years. Those who don't plan end up with the false crises that they deserve.
If you don't replace your Roth funds within 60 days then you will face a 10% penalty for early withdrawal since you are not yet 59-1/2. You can apply for a waiver from the IRS since you are using it for tuition for your daughter and they may approve it. However, in that case you won't be able to replace your Roth funds except to the extent of your usual annual maximum of 6500 apiece for yourself and your spouse--which probably you aren't doing anyhow.
Whether you have a Roth with one institution or another is irrelevant. The rules are the same either way.
If you are fortunate (or unfortunate) enough to be reincarnated, I would suggest starting to plan ahead for your children's college tuition around the time of their birth, rather than on the day before the tution is due.
Hi! You are such a good and loving parent to want to pay for your daughter’s college. I admire that very much. However, I am concerned about your using your retirement savings for her tuition. One thing to consider is that you can still help her out with her tuition later even if you don’t do it right now. It might make more financial sense for her to take out student loans and you put your money back in the IRA within the 60-day-period --- then later on you can help her pay off some or part of the loan (during her college years or after) with money that isn’t earmarked for your retirement. It’s something to think about! Thank you for writing to us.
The answer is yes. As long as you follow the guidlines you will be ok. My recommendation is that you consider having your daughter take a student loan instead of using your retirement nest egg. She has a lifetime to earn income but you are approaching retirement soon and should focus on yourself right now. The last thing you want is for your daughter to have to help support you financially in the future because your retirement didn't last due to paying for her tuition.
Maybe. Contributions (not earnings) to the Roth can be taken out tax and penalty free anytime. So, I am not sure if you are getting the full story. The biggest risk is that you are taking funds out of retirement. But I use the Roth for education funding all the time. See my national article:
The only other rub might be the effect on financial aid for the FASFA. If she going to an elite school she might be using CSS or Consensus, but most use FASFA. The Roth is not used as an available asset but some view the distribution as reportable income. I read the FASFA differently and am still waiting for clarification but just an FYI that it may be reportable for the next year's FASFA. Since the Roth contribution has already had taxes paid on it, I don't think it should be reported on the FASFA and the FASFA reads that way -- to me. There are 529/Roth strategies that can get around this, if it is a concern.
With regards to the 60 days, you are correct. If you are looking to get the money back in.
I write a lot on college funding and as you can tell, I specialize with all parts of the planning and paying for college process for my clients. It has almost become a passion. College is so expensive now relative to incomes, clients need help. Check out my website for more info.
Mark Struthers CFA, CFP®
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This is for informational purposes only. Your specific situation would need to be taken into account. All information is subject to change. Not to be considered investment, tax, or legal advice.
When liquidating your Roth IRA for your child’s education, there are different items to consider. First, all contributions can be withdrawn without tax and penalty. So if you have contributed $30,000 into your Roth IRA, you can withdraw with no issues. As for the earnings, the Roth IRA has to be at least 5 years old for the tax-free benefit. With that said, when you withdraw earnings for college expenses prior to age 59.5, you lose the tax-free benefit of the Roth IRA but the 10% IRS penalty is waived. For my clients that use a Roth IRA for education planning, I recommend withdrawing only their contributions and leave the earnings in for their retirement. As for the withdrawal, you have generated additional income this year which could impact your financial aid next year which is another reason why I don’t suggest withdrawing the earnings from a Roth IRA for educational expenses. If you can, I would consider rolling back the earnings prior to the 60 day deadline.