The value of a college education cannot be overstated in value to a successful graduate. According to the Federal Reserve Board, there is an $830,000 difference between getting a college education over just a high school diploma. These additional lifetime earnings can be spent, saved or reinvested to pay for college costs of the graduates own children.
Currently, the most typical way to pay for the rising cost of college is the Qualified Tuition Programs, or Section 529 plans, Coverdell Educational Savings accounts and Education Savings Bonds, that is if you have done your part by saving for this major expense. The other quite popular way is through student loans. The repayment of these loans may be burdensome, but given that you see your way through college, a loan could be well worth it.
Weighing the benefits of a college degree and the rising costs, it’s no surprise that people are looking for new and creative ways to save for these expenditures. One such alternative method involves the use of a Roth IRA. This may sound a little bizarre. After all, why would anyone use a retirement account to save for education? Here are some reasons why it may not be as crazy as you think.
Roth IRAs are not included as an asset on the FAFSA form.
Roth IRAs—along with other retirement accounts—are not considered assets when determining a family’s Expected Family Contribution (EFC). There’s no cap to this amount either, so parents may actually be able to accumulate significant sums in Roth IRAs and still qualify for student aid for a child.
Roth IRA Flexibility
Roth IRA contributions can be distributed at any age, and at any time, 100% tax and penalty free. So, for instance, if you contribute $3,000 per year to a Roth IRA for the next 10 years before your child goes to college (and take no distributions in the interim), at the very worst, you would be able to take $30,000 tax and penalty free from your Roth IRA.
Now, of course, some of these benefits do come with varied drawbacks, but with careful planning, there are typically workarounds. For instance, when you use Roth IRA distributions to pay for expenses, although they are not taxable, they are counted as income for the sake of filling out your FASFA form, which could affect your chances at financial aid.
Another flexible solution, Roth distributions should not be taken immediately. Instead, utilize student loans. Once college is completed, make Roth distributions to payoff the student debt. As parents, this is a great leveraging tool to incent your child to get good grades and in doing so, their loans will be paid off.