The Roth IRA is a great retirement tool – there’s little argument about that. However, if you’re smart about it, you can also use it to help make college more affordable.
The key to understanding how a Roth IRA can help your kid afford college is the Free Application for Federal Student Aid (FAFSA). This is the application you must fill out if you want your kid to receive federal college aid. The government examines your application and uses a complicated calculation to determine how much you can afford to pay for the education.
One item the FAFSA doesn’t count when determining aid? Retirement accounts. So you’d be smart to stash away as much as possible in the Roth IRA because that money won’t count against you on the FAFSA. As Money notes, the less in assets that are calculated via the FAFSA, the more aid your kid will receive. You should also encourage your kid to save money in the Roth IRA so that it isn’t counted either. After a five year waiting period, your kid can withdraw the principal out of the Roth without a penalty.
Keep in mind that the money you put into the Roth IRA is essentially untouchable during that wait period. You don’t want to withdraw early and get hit with a penalty. If you’re considering using the Roth IRA strategy to earn more college aid, think it through carefully. Make sure that you or your kid won’t need those funds for everyday things like car payments, textbooks and more.