Here's What Happens When You Use a Roth IRA to Pay for College

If the idea of having to pay for college seems overwhelming to you, you're certainly not alone. For the 2022-2023 academic year, here's what average tuition and fees looked like, according to U.S. News & World Report:

• $10,423 for public in-state college
• $22,953 for public out-of-state college
• $39,723 for private college

And these are just averages. If your child happens to pick a more expensive school, your costs could be even higher.

Ideally, you've been setting aside money to pay for college, either in a savings account, a 529 plan, or elsewhere. But if it's not enough to cover your costs in full, then you may be tempted to tap your Roth IRA to pay for college.

The good news is that you're allowed to take Roth IRA withdrawals penalty-free to cover the cost of higher education. The bad news, though, is that if you go this route, you might end up shorting yourself on retirement income down the line.

The problem with tapping your IRA early

Normally, tapping an IRA before age 59 1/2 results in an early withdrawal penalty. The rules here can be a little different with Roth IRAs, since these accounts are funded with after-tax dollars. In that case, you can commonly avoid early withdrawal penalties if you only touch the principal portion of your account, not the gains portion.

But do remember that the main function of an IRA, whether it's a traditional or a Roth, is to save for retirement. And so when you remove funds for another purpose, whether it's to pay for college or to buy a home, you leave yourself with that much less money for your senior years.

And remember, it's not just your principal withdrawals you'll be down. You'll also lose out on investment gains.

Let's say your Roth IRA delivers an average annual return of 8%, which is a little bit below the stock market's average return over the past 50 years. Let's also assume you take a $20,000 withdrawal at age 50 to pay for college expenses. If you're not retiring until age 65, it means you've lost out on 15 years of gains in your retirement plan. The total damage? Almost $63,500.

Don't put your retirement at risk

It's natural to want to do your best to cover the cost of college in full. But if you raid your own savings to pay for college for your kids, you might end up short on retirement funds. That's a risk you don't want to take -- especially when there are different options your kids can explore, whether it's choosing less expensive schools, working during their studies, or a combination of both.

Also, recognize that if you take too much out of your savings to pay for your kids' college, you might end up struggling financially in retirement. At that point, you might have to come to your grown children for money when they're trying to establish families and careers. And in that situation, absolutely nobody wins.