Can I Use My IRA to Pay for My Child’s College?
Withdrawing from an IRA for college involves more than penalty avoidance. Understand the full financial consequences, including the impact on your taxes and student aid.
Withdrawing from an IRA for college involves more than penalty avoidance. Understand the full financial consequences, including the impact on your taxes and student aid.
It is possible to use funds from an Individual Retirement Arrangement (IRA) to pay for a child’s college education. While this can help manage the cost of higher education, it involves specific rules and consequences. Tapping into retirement savings may allow you to avoid an early withdrawal penalty, but the distribution is still subject to income tax. This type of withdrawal can also have a notable impact on a student’s eligibility for federal financial aid.
Taking money from an IRA before age 59½ triggers a 10% additional tax on the distribution. This penalty is designed to discourage early use of funds earmarked for retirement. However, the tax code provides an exception for paying qualified higher education expenses, which allows you to withdraw funds for yourself, your spouse, your child, or your grandchild without incurring the penalty.
To qualify for this penalty waiver, the funds must be used for qualified higher education expenses, which include:
If the student is enrolled at least half-time, the costs of room and board can also be included. The total amount of the withdrawal cannot be more than the total qualifying expenses for the year.
An eligible educational institution includes any college, university, vocational school, or other postsecondary institution eligible to participate in student aid programs administered by the U.S. Department of Education. Before taking a distribution, verify that the student’s school meets this requirement.
Avoiding the 10% early withdrawal penalty does not mean the distribution is free from income tax. The tax treatment of the withdrawal depends on whether you have a Traditional or Roth IRA.
With a Traditional IRA, contributions are often made with pre-tax dollars. This means any withdrawal, including amounts used for education, is treated as ordinary income and subject to federal and state income taxes in the year you take the money. If you have made both deductible and non-deductible contributions, a portion of your withdrawal will be taxable and a portion will be tax-free, calculated on a pro-rata basis.
Roth IRA contributions are made with after-tax dollars. Withdrawals follow an ordering rule where your contributions are withdrawn first, and these are always free of tax and penalty. After all contributions are withdrawn, any subsequent withdrawals are considered earnings. If you use these earnings for qualified education expenses, you will owe ordinary income tax on them but will avoid the 10% penalty.
Using IRA funds for college can impact federal student aid eligibility. The taxable portion of an IRA distribution must be reported as income on the Free Application for Federal Student Aid (FAFSA), which can reduce a student’s eligibility for need-based financial aid.
The FAFSA uses income information from two years prior to the academic year. For example, income from your 2024 tax return will determine financial aid eligibility for the 2026-2027 academic year. A large IRA withdrawal can inflate your adjusted gross income (AGI), which is used in the formula to calculate the Student Aid Index (SAI).
A higher AGI leads to a higher SAI, which reduces the amount of need-based aid a student can receive, such as Pell Grants, federal work-study programs, and subsidized federal student loans. The reduction in financial aid could be greater than the benefit of avoiding the 10% early withdrawal penalty, making it a more expensive option overall.
If you take a distribution from your IRA for educational costs, you must report it correctly on your federal income tax return to waive the 10% penalty. Your IRA custodian will send you Form 1099-R, which shows the gross amount of your distribution in Box 1 and the taxable amount in Box 2a.
To claim the exception, you must file Form 5329, Additional Taxes on Qualified Plans. You will use information from Form 1099-R to report the withdrawal and enter the specific exception code for education in Part I of the form. Without this form, the IRS may automatically assess the 10% penalty on the taxable portion of your withdrawal. The completed Form 5329 is filed with your annual Form 1040 tax return.