Using Roth IRA for Child’s College Education
Hello. Have a client who has real estate rental property. They want to start paying their kids, and have them contribute to a Roth IRA, and use the Roth IRA $ for College Expenses. What’s the rule on Roth IRA earnings for kids college? Thanks.
Permalink Submitted by Alan - IRA critic on Thu, 2019-10-17 18:47
The parents must be sure that the wages paid are reasonable for the work performed. A W-2 should be issued once annual wages exceed $600. Once the education distributions begin, the usual Roth IRA ordering rules apply with earnings coming out last. The earnings will be subject to tax, but not penalty. Details regarding how qualified higher education expenses are determined, how scholarships and grants are treated, and timing requirements for the actual distribution should be carefully studied when the time comes.
Permalink Submitted by David Mertz on Thu, 2019-10-17 18:58
Because distributions from a Roth IRA are unearned income, distributions of earnings, which are taxable income on the child’s tax return, would probably subject to kiddie-tax rates if the amount of earnings distributed is large enough, but would not be subject to early-distribution penalty by application of the higher-education penalty exception. Amounts attributable to regular contributions and Roth conversions come out first, earnings come out last.
Permalink Submitted by William Tuttle on Thu, 2019-10-17 19:10