Overview:
There has been a lot of buzz about using an IRA, especially a Roth IRA, as an alternative type of college savings account. The basis for this idea is that IRA’s allow you to avoid the 10% early withdrawal penalty if used for qualified college expenses.The avoidance of this penalty is often confused with the avoidance of income taxes. These withdrawals will not avoid normal income tax on funds that are previously untaxed, regardless of whether you withdraw them from a Traditional or Roth IRA.
Using a Roth or a Traditional IRA is an advanced financial planning strategy that requires numerous questionable assumptions, and is generally not recommended. The benefits of this technique are comparable to the benefits of using a Section 529 Savings Account or a Coverdell ESA.
Ideal Investor:
Investing for college in Roth or Traditional IRA should be evaluated when a number of the following conditions are present:
- A parent is sophisticated in their understanding and knowledge of tax rules.
- Retirement objectives are already being met sufficiently through other plans.
- The parents or child are eligible to contribute to an IRA.
- They will not get financial aid if they show any college savings.
- They have already maxed out other college savings options, or are not eligible based on their income.
- They will not likely need to withdraw more than their original investment.
- They want to retain final control over unused assets.
