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How to save for college and retirement using Roth IRA

Roth IRA is one of the best choices out there when it comes to saving for your children’s college education, as well as your retirement.



When it comes to putting money away for the years to come, you have quite a few options available. One of these is a Roth IRA, which could be your best choice when you’re planning your child’s education. As a parent, cutting down on a few small expenses and making the right choices now will help you offer your child a secure future!

4 ways to boost your savings

Here are some tips that will help strengthen your personal finance strategy for college savings as well as retirement:

1. Start saving early and often

If you get used to saving money for your kids’ education when they’re still young, you have a better chance of building a good-sized nest egg by the time you retire. By starting early, your money will have the potential to grow that much more, thanks to the magic of compounding interest.

For a college student, retirement planning is probably the last thing on their mind. However, college is expensive, even if they get a scholarship, so encourage them to start saving early. The earlier you and your child start saving, the larger your college and retirement nest egg will be.

Here’s another reason to start putting funds in an IRA now: When you save even small amounts of money and give it more time to grow, you actually need to put less money away every month to reach a certain goal. Plus, the tax benefits compound over time too. You need to save every penny, especially with skyrocketing tuition and living costs!

2. Remember, Roth IRAs offer unique benefits

It may seem like a bad idea to tap into a retirement account for college expenses, but look at some of the advantages a Roth IRA gives you as a saving tool:

  • Unlike most other IRA or retirement accounts, early withdrawals from a Roth IRA do not incur penalties or taxes. While only applicable up to the total amount you’ve contributed, it can help cover college tuition in a pinch.
  • While determining financial aid, all of your assets, earnings and savings are taken into consideration (even a 529 College Savings Plan), except a Roth IRA. The money you’ve saved in this account won’t count against your child’s eligibility.
  • Withdrawals from a 529 plan (for any purpose other than college) involve tax and penalty. For someone who decides not to go to college, Roth IRA savings can still be used for retirement savings or other purposes, penalty-free.
Roth IRA for college

There are tax advantages you can use to save for your child’s education. (Source)

3. Understand the tax breaks and rules

Depending on your income and your child’s status in school, there are some tax advantages you can use to save money:

  • You can save up to $2,500 annually during the first four years of undergraduate study (for students enrolled at least half-time) with American Opportunity Credit. Of this amount, 40% is a refundable credit, so it can be paid even if you have no tax liability. MAGI (modified adjusted gross income) limits are $90,000/$180,000 (singles/joint filers claiming the credit).
  • The Lifetime Learning Credit isn’t affected by student status or the number of years in school, and can save you up to $2,000 (non-refundable). MAGI limits are $55,000/$110,000.
  • If you don’t qualify for tax credits, you could receive an income adjustment of up to $4,000 with the Tuition & Fees Deduction. MAGI limits are $80,000/$160,000, and it’s not limited to the first four years of college.

Don’t take distributions till the final year financial aid form has been filed. Stay updated with tax rules and loopholes (which keep changing). For instance, in the 2017-18 academic year, you can use tax returns from your child’s sophomore year while applying for aid in their senior year. Consult a tax professional or personal finance advisor too.

People are retiring younger, with better health and more time to enjoy their golden years. If you want to spend your retirement at leisure without worrying about how to stay afloat, make the most of every penny you save. Your kid’s college education could be the largest expense you deal with, so plan it right and get cracking on your savings plan today!

DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation for writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.

Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning, and over the last 10 years has turned his focus to self-directed accounts and alternative investments. Rick regularly posts helpful tips and articles on his blog at SD Retirement as well as, SAP, MoneyForLunch, Biggerpocket, SocialMediaToday, and NuWireInvestor. If you need help and guidance with traditional or alternative investments, get in touch with Rick.