A Roth IRA may be a good college investment option. The advantages are: (1) it is a non-assessable asset in the EFC computation, (2) the earnings grow tax-free, (3) early withdrawal of only the contributions will be tax-free, (4) current year contributions will not prevent a contribution to a tuition prepayment savings plan, (5) withdrawal from a Roth IRA will not affect eligibility to claim the Hope Credit or Lifetime Learning Credit nor will it reduce the “qualified education expenses” for the student loan interest tax deduction, (6) no taxability of withdrawals of contributions if used for non-college purposes, (7) control of the asset remains with the parent, (8) up to $5,500 per year may be contributed by each parent, and (9) with proper tax planning, the child may be able to contribute $5,500 annually to the childs own Roth IRA.

Specific Details

Jack and Jill operate a sole-proprietor business. Their ten-year-old child, Ryne, worked in the business on weekends and during his summer school break. Ryne was paid $5,500 per year for this work. The parents received a tax deduction for these wages and because Ryne was under 18 years of age, they were not required to withhold social security payroll taxes on these wages. Since Ryne dreamed of going to college, he invested the $5,500 in a Roth IRA to help cover his future college costs. In addition to the $5,500 Ryne invested, his parents contributed an additional $5,000 each to their own Roth IRA, which can also eventually be used for future college costs, for a total of $16,500 per year. If Ryne ends up qualifying for financial aid, that $16,500 will not be assessed as an asset, increasing financial aid eligibility by $924..

Potential Savings

If you are in a financial aid asset assessment rate of 5.6%, you could increase your financial aid eligibility up to $56 for every $1,000 of asset reduction by investing in a Roth IRA for college.