Roth IRAs have a lot going for them – investment options and tax benefits are just two advantages. One area where Roth IRAs are not advantageous is when it comes to paying for college, especially when there are better options. Keep reading to see why using a Roth IRA to pay for college is a bad idea – and then learn four reasons why 529 plans are a better alternative.
Unlike many other investment accounts, Roth IRAs do not negatively impact financial aid applications. Regardless of how much money you have in your Roth IRA when your child goes to college, the balance is ignored for purposes of federal student aid calculations in figuring your Expected Family Contribution.
On the other hand, if you use funds from your Roth IRA, the situation is very different. Distributions received from your Roth IRA increase the income you are required to report on your federal aid application (FAFSA). Essentially, withdrawals from your Roth IRA make your child less eligible for need-based student aid.
529 plans are a better college savings account because tax-free distributions do not get reported as untaxed income on the dependent student’s FAFSA. The value of a 529 account is reported on the FAFSA unlike a Roth IRA. The impact is limited though because your EFC increase is capped at 5.64 percent of the account balance.
Four Reasons to Choose a 529 Plan over the Roth IRA