Five advantages of a Roth IRA to save for college

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College costs have skyrocketed in the past 20 years. According to a recent survey from...

College costs have skyrocketed in the past 20 years. According to a recent survey from the College Board, it cost an average of $18,391 to attend an in-state, four-year public school for the 2013-2014 academic year (including room and board). Even with federal financial aid, it is difficult for many people to afford these kinds of college costs.

One way to save money to put toward a college education is to purchase a Roth Individual Retirement Account (IRA). The following are five reasons a Roth IRA can help put your children (or yourself) through school.

Your dividends are tax-free

Deposits into a Roth IRA are not tax-deductible, but your savings will grow tax-free. When you deposit funds into a Roth IRA account, you pay taxes at the time of the deposit. Any gains made on your deposit are not taxed later. However, you are subject to a 10 percent penalty fee on the amount of distribution before the age of 59 and a half, and there is a five-year conversion rate. That means you will be penalized if your account is less than five years old.

You can withdraw your money any time

If you are younger than 59 and a half and you withdraw money, you will have to pay a penalty. However, if you have a reason to withdraw the money, such as paying for your child's college education, you will avoid penalties. With traditional IRAs, you have to pay taxes when you withdraw money, but with a Roth, you pay taxes when you first contribute.

You can contribute at any age

It doesn't matter whether you are 18 working your first job or 84 and still working - as long as you are earning money, you can contribute. There is a rule that you can never contribute more than you make. So, if you are a student and earn $2,500 a year through a part-time tutoring job, that is the limit to which you can contribute.

You are still eligible for financial aid

If you are applying for financial aid and aren't withdrawing from your IRA, this will not affect the maximum amount for which you are eligible. However, during that financial aid year, if you have withdrawn money from the IRA, it can change your benefit amount. The rule of thumb is to utilize your financial aid package first, then withdraw if you need additional money later.

You can invest in opportunities

Let's say the money you saved for college was not used. With a tax-free fund, you can use the money to purchase something such as a new home at any time. This differs from the popular 529 college savings plan, which has penalties if you don't use the savings for college.

For more information on Roth IRAs, contact an Atlanta financial advisor.


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