Many parents set up 529 or Coverdell Educational Savings plans to help fund college costs, but there may be advantages to using a Roth IRA for the same purpose. For instance, you could withdraw your contributions (the principal), for this purpose. In addition, if you also withdrew the earnings you would be subject to income tax on the earnings, but the 10% early withdrawal penalty doesn’t apply because qualified higher education expense is a penalty exception. Qualified educational expenses include such costs as tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution.
However, because of the contribution limitations of a Roth IRA, you may not be able to put away enough money to cover four years of college costs. On the other hand, most 529 plans have contribution limits well more than $300,000, giving contributors the ability to cover most, if not all, of their child’s college costs. (See: How to Choose a 529 Educational Savings Plan)
With 529 plans, if your child doesn’t use the money for education – and you don’t have another qualified family member to transfer the 529 funds to – once you start withdrawing the funds, you would typically be responsible for paying income taxes on the investment gains within the account, and you would be assessed an additional 10% penalty tax for using your 529 savings for non-qualified expenditures.
With a Roth IRA, if your child doesn’t need funding for higher education, you can keep the money in the account until you’re ready to withdraw it.