<p>My S is a rising junior in high school who has saved a significant amount of money from his summer job. If he saves or invests the money in a conventional way, we will take an EFC hit when he applies to college. Can I avoid this problem by having him open a Roth IRA?</p>
<p>It seems like it would work as retirement savings are not considered in computing his EFC for FAFSA. However, there is the caveat that then this money is not available until age 59 1/2. There is a stipulation that money can be withdrawn from a Roth for educational purposes at an earlier age without penalty. I have no experience with this personally, so I don't know if there's anything to prevent him from holding the money in a Roth and then taking it out for educational purposes when he is in college. There may be a waiting period within which there are penalties on all withdrawls??</p>
<p>The important thing with opening a Roth is to be sure to document his earnings.</p>
<p>hazmat, thanks for the link, good information for all. From the citation below, it looks like if he held withdrawals to contributions then there are no taxes due. However, the last line is important as any withdrawals will count as income on the following year's FAFSA.</p>
<p>"Some parents use a Roth IRA as a combined college and retirement savings vehicle. When they need to pay for college expenses, they limit their withdrawals to the contributions in order to avoid paying any income taxes on the distribution. The earnings remain in the Roth IRA to pay for retirement. (Conceptually, both the contributions for college savings and retirement are independently earning a return that builds the value of the Roth IRA account. But since money is fungible, you can withdraw the contributions while leaving the earnings in the account.) The main problem with this approach is the distributions count as untaxed income on next year's FAFSA, reducing eligibility for need-based financial aid."</p>
<p>Don't forget that part.</p>
<p>It's $4000. $5000 if you're over 50.</p>
<p>I meant the allowable earnings on FAFSA.....that was all. Limits on contributions are another thing but you covered that, thanks.</p>
<p>Hi,</p>
<p>Another thing to keep in mind, if things haven't change, is that the funds need to be in there 5 years form the initial deposit date before you can take out the principal portion without penalty. This can work good though if you or another family member are able to loan him the money while he is in school, and he can then make withdraws after college. This way he would be past the 5 year mark, and the withdraws wouldn't affect income rules for FASFA at that point.</p>
<p>I think I also read somewhere that PROFILE does look at even kids IRA's. Not sure on that though</p>
<p>djd</p>
<p>We have advised our kids to put one half of their summer earnings into Roth IRAs with a match from us (most kids get allowances, ours get this). H and I were both CPAs and do this for several reasons:
-want to encourage the kids to save some of their earnings
- this is the only time in their lives when their earnings are virtually income tax free since they don't make enough to be too far over the student/single standard deduction amounts and by putting those earnings into a Roth, these earnings will basically never be taxed
-5 year withdrawal rules allow them to get at it for grad school, house, etc if they absolutely need to
-we don't mind eating lots of spaghetti, driving an old woody wagon and cutting back for the kids. Yes, we are fortunate that we can do this without it cutting into our necessities; I know that there's lots of families that could not match the contributions and that need the kids' earnings to survive. But we hope this teaches our children the perspective of long term gratification as opposed to the instant gratification syndrome they seem to be surrounded by. For us, it seems to work.</p>
<p>hello again,</p>
<p>One thing I am not sure of after doing a little reading today is if it would work as I was advised. The question being that the IRA rules state something to the effect of " the withdrawl needs to be made in the year the expense was incured". </p>
<p>Does it count if "the expense" is a loan payment, or is the expense counted as each semester or year goes by? </p>
<p>I am going to check with my financial guy who admitedly is NOT a college planning specialist.</p>
<p>Any thoughts?</p>
<p>djd</p>
<p>djd, That's a good question, seems like loans should count as they originally paid for educational expenses such as tuition, books, etc. But logic doesn't always work in these situations, so it would be nice to know the answer.</p>
<p>Sewbusy, Same here, I've been doing some matching in a Roth since my D started earning money during the summer. We don't have any intention at this time to use it for school as it's still a pretty small amount. Mostly, it's a great lesson in long term saving and the magic of compound interest.</p>
<p>
[quote]
Does it count if "the expense" is a loan payment, or is the expense counted as each semester or year goes by?
[/quote]
</p>
<p>No. The qualified education expense has to be incurred in the year to count - that means the tuition/fees etc. Paying off a student loan does not count as a higher education expense.</p>
<p>Swimcatsmom,</p>
<p>You seem pretty sure about this, and I don't doubt your answer. What I am wondering is your answer form experience, or have you seen it "in writng"? I took a look at the IRS website form 590 (I think) that deals with IRA's. They dont really clarify this point of what counts or not - meaning current cost vs loans being "qualified expenses".</p>
<p>I your opinion from the goverment tax perspective vs the schools definition? I assume so since it isn't really related to the school, but rather a "tax" issue.</p>
<p>Good link Hazmat!</p>
<p>One consideration that probably hasn't been mentioned is using the money deposited in the Roth IRA as an escape valve for funding the last 1.5 years of college costs. This can be done without a FA penalty. I'll describe.</p>
<p>When the article mentions that the withdrawal from a Roth gets added to the ** next ** year's FAFSA filing it can bite you in the rear end. However, if you wait long enough, that is not the case. Let's say your student is going to graduate in May '09. You will be filing that Senior year FAFSA in January '08 using your '07 Tax Return. </p>
<p>Let's say on Jan 2, '08 you cut a check from your Roth IRA to pay the Bursar for the Spring '08 term. And then you cut a check during the summer '08 to pay for the Fall '08 term and cut a check in December '08 to pay for for that last Spring '09 semester. Since all 3 withdrawals are on your '08 taxes and those won't be required for any FAFSA filing (assuming her that you don't go to grad school - if going to grad school, use this technique for the last 3 terms in grad school) because you've gotten the award for your senior year already. </p>
<p>You still get to avoid the penalty for early withdrawal because the money is used to pay for college, yet it does not end up being reported on a FAFSA.</p>
<p>Food for thought.</p>