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Posted by Tiffany Gaskin

How to Take Advantage of an IRA for College Savings

How to Take Advantage of an IRA for College Savings

College funding is increasing every year, and other methods to subsidize the fees have made no significant difference. The rise in fees is more than the rate of inflation, which stands at 8% annually. Colleges are expected to start paying twice the current fees in nine years. The college inflation rates have raised eyebrows among many parents. However, there are many ways to save for college that could benefit the holder. 

The IRA account is one way of funding college or graduate school for your child. However, there are warnings about using your IRA account to fund college. Account holders below 59 & 1/2 years old are taxed 10% on every withdrawal, but the office allows individuals funding college through the account tax-free. And there are certain criteria to qualify your account for college funding. The funding must be for oneself, your spouse, child/children, or grandchild. From the IRA account, parents can pay for their child’s education expenses, such as tuition, supplies, equipment, and books in school.


Roth IRA vs. Traditional IRA in College Expenses

If you’re planning to use either the Roth IRA or Traditional IRA to sponsor your child in college, you should know there is a wild gap between them. 

A Roth IRA operates using the post-tax dollar system, while a traditional IRA uses the pre-tax dollar system. Though both accounts are exempted from paying the 10% penalty for withdrawing from the account, traditional IRA accounts pay initial income tax for early contributions from the account. So it is best to use the Roth IRA account over the traditional account when funding your child’s college education expenses.

The tax is not levied on the Roth IRA account because it receives post-tax money, which makes the contribution in the account entirely usable. However, people with a Roth IRS account, which has existed for less than five years, who decide to withdraw all the contributed funds to pay for college are expected to pay tax. For example, an individual who contributed 40 thousand dollars which has grown over the years to 55,000 dollars, can use up to 40 thousand dollars in the Roth IRA account. This amount is not taxable and can be used within five years.


Advantages of IRAs for College

Since the IRA account is a great way to plan for retirement makes it an excellent way to save for higher education. The account is exempted from tax when withdrawals are made from IRAs. The earnings and withdrawals are tax-free because the taxes have been deducted, making it possible to use the contributions at any needed time and season. Most college student funding is done through the IRA account. However, it is more beneficial if you have kids at a late stage in life or you’re planning to fund your grandkids’ higher education expenses. The stage of life with the IRA begins at 59 & 1/2, which is five years after retirement. Your earnings and contributions are tax-free, but those under 59 & 1/2 will have to pay taxes on withdrawals.


How an IRA Withdrawal Affects Financial Aid

Students who get their college funding from an IRA account are less qualified for student financial aid. When students apply for financial assistance, they must submit a report of income and assets to the FAFSA. The agency allows free application by the student, which most schools use to give awards to aid. The report should contain funding from two years back to determine family financial needs. 

Money in the IRA account is, among other assets, exempted from evaluation by the FAFSA for financial aid. However, the fund from the retirement account is considered income and affects student financial aid approval within two years of withdrawal. 



Tiffany Gaskin
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