Under certain circumstances, an IRA can be a smart way to save money for college—especially if you have invested in other college savings vehicles as well.

How Does an IRA Work for College Saving?

Withdrawals from IRAs before age 59½ are subject to a 10 percent penalty. But if you use the withdrawals to pay for qualified education expenses, you may not have to pay this penalty.

• Account owners can contribute up to $5,500 per year ($6,500 if the owner is 50 or older), depending on income.
• Until withdrawn, IRA funds are sheltered from financial aid need analysis.
• There is no penalty if the IRA is not entirely used for college. This means you can use the money for both college and retirement.

How IRA Money Can Be Used for College

You can use your IRA withdrawals to cover qualified educational expenses of a child or grandchild. Qualified expenses include tuition, fees, books, supplies, and required equipment. If the student attends college half-time or more, room and board also count as qualified educational expenses. (Eligible expenses are first reduced by any tax-free educational assistance, such as a tax-free scholarship, grant, veteran's assistance, or employer assistance.)

The Roth IRA vs. a Traditional IRA

Financial advisors tend to recommend the Roth IRA (funded by after-tax dollars) over a traditional IRA (funded by pre-tax dollars) for college savings for the following reasons.

• Withdrawals of the principal on a Roth IRA held for at least five years are tax-free if the earnings are not withdrawn.
• If the account holder is over age 59½, withdrawal of both earnings and principal are entirely tax-free.

Savings Limits Based on Income

However, with a Roth IRA, your income can limit how much you may contribute. For 2018, Roth IRA contributions are reduced (phased out) at modified adjusted gross incomes between $120,000–$135,000 (for single filers), $189,000–$199,000 (for married individuals filing jointly), and less than $10,000 (for married individuals filing separately).

With a traditional IRA, income has no effect on the amount of your contribution. But if you or your spouse is covered by a retirement plan at work, your income may affect how much of your contribution is tax deductible.

You May Need Advice

Using IRAs for college can lead to tax or financial aid disadvantages and should be done only if retirement is covered by other sources. Your financial advisor is your best source for guidance.