Choose a college or university that is fully accredited to qualify for withdrawing college funds from your Roth IRA without a 10 percent penalty. The chosen institution of higher learning must be eligible for state and federal assistance. The penalty-free withdrawal is valid only if the money is used for college expenses The funds can be used only to pay for books, supplies, equipment and any other expenses directly related to education. Room and board, as well as tutoring services, are considered eligible items.
Compare the advantages of Roth IRA withdrawals over taking out loans for college tuition. Understand that the Roth can be used to pay for college expenses and still be used to pay for retirement with no tax at all. Withdrawals of the principal are tax-free if the earnings on the principal are not withdrawn before the IRA owner reaches the age of 59 1/2 and the account has been held at least five years.
Learn what the restrictions and limitations are for early withdrawal of contributions. Qualified educational expenses must first be reduced by withdrawals from an Education Savings Account (ESA) and/or any tax-free educational assistance such as a grant, veterans assistance and employer's assistance. Distribution must be made during the same year that the qualified expenses are paid.
Consider all the available options and understand that you may take any contributions from your Roth IRA without penalties or tax. Any investment earnings may also be withdrawn penalty-free and tax-free if they have been held for five years or longer and the owner has reached the age of 59 1/2. However, withdrawals of investment earnings are subject to regular income tax, even for educational purposes, if they have not been held for the minimum period of five years.
Consult with a financial adviser before making an early withdrawal to pay for college tuition for yourself, your spouse or your child if you are younger than 59 1/2. Consider other alternatives until you attain the age to withdraw funds penalty-free and tax-free. Use the Roth IRA to your advantage.