When you're facing big expenses, a Roth IRA makes a better cushion than a traditional IRA. You've already paid income tax on the money you contribute to a Roth IRA, so the IRS doesn't care if you take the money back out again. If you contribute $10,000 into your account, there's no problem withdrawing it to pay for college. Withdrawing earnings or rollover contributions is harder.
If you take an early distribution of earnings from a Roth IRA, you pay income tax plus a 10 percent penalty on the amount withdrawn. The withdrawal is early if your Roth has been open less than five years and you're not yet 59 1/2 years old. When you transfer assets from a traditional IRA to a Roth, you must wait five years after the conversion to withdraw the assets unless you've turned 59 1/2. Even if you've paid income tax on the transfer, you still pay a 10 percent penalty on the early withdrawal.
The law lets you take out earnings and transferred funds from a Roth without a penalty to cover college expenses -- yours, your spouse's or your children's. If the account is older than five years, you don't pay income tax on the withdrawal. You can use your Roth to pay for tuition, fees, books, supplies and equipment for college. If your children are attending at least half-time, room and board are also qualified expenses.
You don't have to write the check directly to the college to qualify your Roth distribution. If you pay your kids' bills with a savings account, your regular wages, an inheritance, a loan or a gift, you can withdraw money from your Roth to reimburse yourself. If you pay using a tax-exempt scholarship, a grant, a Coverdell savings account, veteran benefits or any other tax-free educational assistance, your Roth money stays where it is.
If you're worried about accidentally taking out earnings early instead of contributions, the IRS has that covered. Suppose you have $50,000 in contributions in your Roth, plus $15,000 in earnings and a $30,000 transfer. Under IRS rules, the first $50,000 you take out automatically counts against your contributions. Then comes the conversion and only then do you tap earnings. That may help you keep the earnings and converted funds in the account until the various deadlines pass.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.