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Dec 7 2009 12:00AM


Can Roth Individual Retirement Accounts (IRAs) be used for qualified education expenses?


"The short answer is yes," said FPA member Robert Cochran, CFP®, vice president, chief compliance officer, and partner of PDS Planning. "You can use dollars in a Roth IRA account for qualified education expenses. But the distribution from the Roth IRA account could have a big impact on your child's eligibility for financial aid, and it could also result in a tax issue."

According to Cochran, your contributions to the Roth IRA account can be distributed tax-free at any time, for any purpose. The earnings can be distributed without taxes after you reach age 59 ½. "Qualified education expenses do not allow you to avoid taxes on withdrawing earnings prior to age 59 ½," he said. "You do avoid an extra 10 percent penalty tax if the withdrawal is for qualifying higher education expenses (QHEE). But the withdrawal is still subject to regular taxation prior to age 59 ½."

Cochran said Roth IRA account withdrawals are treated as income for purposes of the financial aid formula, and up to 47 percent of parent income can be considered available to pay for college.

"So, yes, you can use the Roth [IRA] for QHEE, but the caveats might result in other problems, such as financial aid or taxes," Cochran said. "You are probably better off looking for loans or other ways to pay for college, assuming your Roth [IRA] is seen as an active part of your retirement plans. After all, children can borrow for their education, but parents can't borrow for their retirement."

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