Can a Roth IRA Be Useful in Saving for College in Arizona?

Roth IRAs are a popular investment vehicle—for good reason. These accounts offer key advantages over other investment options such as 401(k)s. While Roth IRAs are commonly used for retirement, they also offer key advantages for paying college tuition. If you are struggling to determine the best way to pay your tuition, it could be helpful to consult with a skilled student loan lawyer. Here is some helpful information about using a Roth IRA to save for college in Arizona.

Roth IRAs vs. Other Saving Options

There are many kinds of accounts and options students have at their disposal to save money for college. Some of the common options used to save for tuition include:

  • 529 plans. These are tax-advantaged accounts that can be used to cover any educational expenses from kindergarten to graduate school.
  • Stock market portfolios. A stock market portfolio usually includes a collection of financial investments, including stocks, bonds, and commodities—to name a few. The balance of stock market portfolios fluctuates in accordance with market trends.
  • Regular savings accounts. These are accounts offered by retail banks where you can store cash and earn interest.
  • 401(k)s. These are tax-advantaged, contribution retirement accounts.
  • Coverdell education savings account (ESA). This is a tax-deferred savings account that assists families with educational expenses. Beneficiaries must be 18 years old or younger when the account is established.

These are a few of the popular accounts people use to save money for college. The problem with many of these tax-advantaged accounts is that the government essentially locks your money away, making it difficult to access. When you withdraw money from a tax-advantaged account, there can be penalties or fees. Additionally, many tax-advantaged plans come with investment restrictions. Both 529 and Coverdell plans have restrictions on the kinds of investments you can make.

Conversely, savings accounts and stock market portfolios provide more flexibility in terms of access. However, they don’t come with any of the appealing tax advantages of 529 plans or ESAs.

Roth IRAs provide the best of both worlds. In addition to flexibility, Roth IRAs offer a wide variety of investment choices than alternative tax-advantaged accounts.

Can a Roth IRA Be Useful in Saving for College in Arizona?

In a Roth IRA, you add “after-tax” dollars to your account, meaning you essentially pay taxes as you deposit money into the account. The maximum amount of money you can put into a Roth IRA on an annual basis is $6,000 or $7,000 for individuals over 50. Since these accounts require you to pay taxes when you deposit funds, it means when you withdraw funds, they are tax-free.

With Roth IRAs, there are certain eligible higher education expenses that you are allowed to withdraw funds for. Although Roth IRAs are traditionally thought of as retirement accounts only, they offer a great way to save for retirement while providing an option to pay tuition if you need to.

What Are the Drawbacks of Using a Roth IRA for Tuition?

In any financial decision, it’s important to weigh the pros and cons and choose the path that is best for your situation. When determining if using funds from a Roth IRA is right for you, you have to identify who’s Roth IRA you’re talking about: Is it the student’s Roth IRA or their parent’s?

Using a student’s Roth IRA can pose a challenge for saving, as there are limits on how much money you can contribute to a child’s account. As a child gets older, these limitations start to ease up. However, the amount you can contribute is still relatively low. Another thing to consider is that when you use money out of a child’s account, it counts as income for that child. This means that the funds might help with a student’s freshmen year tuition, but when you fill out the FAFSA for their sophomore year, you’ll have to report any money withdrawn from their Roth IRA as income. As a result, it could affect the student’s financial aid package.

If you are using a parent’s Roth IRA account, the big drawback is that you’ll likely be withdrawing from your retirement account during the middle of your life. Since Roth IRAs place limitations on the amount you can contribute, it’s important to consider whether or not you’ll be able to make up the losses before you want to retire. Withdrawing money from a Roth IRA in the early or middle years of your life can hinder the long-term returns on that money.

Ultimately, determining whether or not to use a Roth IRA for tuition will depend entirely on your situation. The best way to decide the best payment plan for college tuition is to consult with a skilled student loan lawyer.

Consult a Skilled Student Loan Lawyer

If you are struggling to figure out the best way to save for college or pay tuition, you should consider working with a skilled student loan lawyer. A student loan lawyer can explain all the important factors to consider and help you navigate choosing the best payment plan for your situation.

At McCarthy Law, our attorneys are dedicated to helping students navigate the complexities of the student loan system. Under our student loan debt settlement program, our licensed attorneys negotiate with lenders to ensure our clients pay only a fraction of their original loan balance. To schedule a consultation with one of our skilled student loan settlement attorneys, call (855) 976-5777 or fill out our online contact form.

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Kevin Fallon McCarthy

Kevin Fallon McCarthy is the McCarthy Law PLC’s managing attorney and an experienced Phoenix debt attorney. Mr. McCarthy has also worked as general counsel for a large corporation. He has corporate counsel experience in human resource matters, general corporate governance, and union class action litigation.