Roth IRAs can help pay for college.
If you take note of a few simple rules, you can withdraw money, tax-free, from your Roth IRA to pay for qualified education expenses. In order to avoid a tax hit, you will need to make sure you do not dip into Roth IRA earnings prior to age 59 1/2. Only original contributions can come out tax-free. You also need to ensure that you spend the money on college expenses that the Internal Revenue Service (IRS) allows.
Instructions
1. Contact the custodian of your Roth IRA. Generally this is a mutual fund firm, brokerage or bank. In order to use Roth IRA funds to pay for education expenses, you must take a distribution from the IRA. You can usually initiate this process with your custodian over the phone, via the mail or through their website.
2. Be sure you do not cross from deducting original contributions to withdrawing earnings. The contributions you make to a Roth IRA have already been taxed as earned income. When you take them out, you are not subject to paying that tax on them again. Contributions always come out first when tapping a Roth IRA. After you have withdrawn contributions, earnings are released and subject to applicable taxes.
3. Verify that you will be using the money to pay for qualified education expenses. Joseph Hurley of Bankrate.com notes that these generally include tuition at most higher education institutions, mandatory fees, books, supplies, equipment and room and board. Typically, you must pay a 10 percent penalty on all Roth IRA distributions prior to age 59 1/2. The federal government waives this fee when you are paying for permitted education expenses.
4. Make college-related payments as you normally would. Save receipts for payments made for all qualified education expenses. The IRS might ask to see them in the future.
Tags: education expenses, qualified education, qualified education expenses, education expenses, original contributions, your Roth