Can My Child Access Roth IRA for Kids Funds for Education or Medical Expenses? | Mora

A Roth IRA for Kids offers flexibility beyond retirement savings, allowing you to access funds for significant expenses, such as education and medical bills, without jeopardizing long-term growth. 

In this article, we will look at:

• How Roth IRA for Kids withdrawals work, including contributions vs. earnings
• Using Roth IRA for Kids funds for qualified education and medical expenses
• How Roth IRA for Kids withdrawals impact financial aid and FAFSA
• The five-year rule and its implications
• Key advantages and drawbacks of using Roth IRA for Kids for unexpected expenses

Understanding Roth IRA for Kids Withdrawals: Contributions vs. Earnings

Roth IRA for Kids are known for their unmatched flexibility. To get the most out of your child’s account, it’s crucial to understand the difference between contributions and earnings, as well as the distinction between qualified and non-qualified distributions.

Contributions

Contributions are made with after-tax dollars, meaning you’ve already paid taxes on this money. They can be withdrawn at any time, for any reason, without incurring taxes or penalties.‍

Example: If your child has contributed $5,000 to their Roth IRA for Kids, they can withdraw that amount anytime, tax- and penalty-free- even for non-qualified expenses.

Earnings

Earnings (the growth generated by contributions) are treated differently. To withdraw earnings tax- and penalty-free, the withdrawal must meet two key conditions:

• The Five-Year Rule: The Roth IRA for Kids must have been open for at least five years. The clock starts on January 1 of the year you make your first contribution, regardless of when during that year the contribution is made.

Example: A contribution made in November 2024 would start its five-year clock on January 1, 2024. Earnings become eligible for tax-free withdrawal on January 1, 2029.

• Qualifying Conditions: One of the following must apply:
  • The account holder is 59½ or older.
  • Funds are used for a first-time home purchase (up to a $10,000 lifetime limit).
  • The account holder becomes permanently disabled.
  • The withdrawal is made by beneficiaries after the account holder’s death.

Example: If your Roth IRA for Kids includes $2,000 in earnings and doesn’t meet the above conditions, withdrawals will incur income tax and a 10% penalty unless an exception applies.

Learn more about Roth IRA for Kids' qualified withdrawals in our article 'Qualified Withdrawals from a Roth IRA for Kids'.

Qualified vs. Non-Qualified Distributions

Understanding whether a withdrawal is qualified or non-qualified helps you avoid unexpected taxes and penalties:

• Qualified Distributions: Withdrawals that meet both the five-year rule and a qualifying condition are completely tax- and penalty-free. This applies only to the earnings portion, as contributions are always accessible tax- and penalty-free.
• Non-Qualified Distributions: Withdrawals that don’t meet these criteria are considered non-qualified. While contributions remain tax- and penalty-free, earnings may be subject to:
  • Income Tax: Taxed at the account holder’s ordinary income tax rate.
  • 10% Early Withdrawal Penalty: Unless an exception applies (e.g., education or medical expenses).

Exceptions to the 10% Early Withdrawal Penalty

Certain scenarios allow penalty-free withdrawals from earnings, even if the withdrawal doesn’t qualify under the five-year rule. These exceptions include:

• Qualified Higher Education Expenses: Tuition, fees, books, and room and board (if enrolled at least half-time).
• Medical Expenses: Unreimbursed expenses exceeding 7.5% of your adjusted gross income (AGI).
• Health Insurance Premiums During Unemployment: If you’ve received unemployment compensation for 12 consecutive weeks.
• Birth or Adoption Expenses: Withdraw up to $5,000 penalty-free within one year of the event.

Example: If your Roth IRA for Kids has $7,000 in contributions and $3,000 in earnings, withdrawing $5,000 for tuition. The $5,000 withdrawal includes $2,000 from contributions (tax- and penalty-free) and $3,000 from earnings. The $3,000 earnings portion waives the 10% penalty due to the education exception but may still incur income tax if the five-year rule hasn’t been met.

Qualified Education Expenses: Accessing Roth IRA for Kids Earnings

Using Roth IRA for Kids funds for education can reduce the need for student loans. While contributions are always accessible, earnings can also be used penalty-free for qualified higher education expenses.

What Counts as Qualified Higher Education Expenses?

• Tuition and fees
• Books and supplies
• Room and board (if the student is enrolled at least half-time)

How It Works

• Contributions: Always tax- and penalty-free.
• Earnings: Can be withdrawn penalty-free for qualified expenses, but income tax may apply if the five-year rule hasn’t been met.

Example: If your Roth IRA for Kids has $7,000 in contributions and $3,000 in earnings. The $7,000 contribution is tax- and penalty-free. The $3,000 earnings can be used penalty-free for tuition but may incur income tax.

Contribution Limits and Earned Income Requirement

• Annual Contribution Limits: In 2025, Roth IRA for Kids contributions are limited to $7,000 per year for individuals under age 50.
• Earned Income Requirement: Contributions cannot exceed the amount of earned income your child has in the contribution year. some text

Example: if your child earns $5,000 in 2025, they can contribute up to $5,000 to their Roth IRA for Kids for that year.

Learn more about Roth IRA for Kids contributions in our article ‘How Much Should You Put Into Your Roth IRA for Kids?’.

Financial Aid Considerations: How Roth IRA for Kids Withdrawals Impact FAFSA

Roth IRA for Kids withdrawals can be a valuable tool for managing education costs, but they also come with implications for financial aid eligibility. Understanding how these withdrawals are treated on the Free Application for Federal Student Aid (FAFSA) can help you make informed decisions.

How Withdrawals Impact FAFSA

When Roth IRA for Kids funds are used for education expenses, the withdrawn amount is treated as untaxed income on the FAFSA in the following year. This means:

• Increased Expected Family Contribution (EFC): FAFSA considers up to 50% of untaxed income for determining financial aid eligibility.
• Potential Reduction in Need-Based Aid: A higher EFC can reduce or eliminate need-based aid, making it crucial to plan withdrawals carefully.

Timing Tips to Minimize FAFSA Impact

• Consider Withdrawing Funds After the Final FAFSA Filing Year: If the student won’t need to file a FAFSA in future years (e.g., their senior year of college), timing withdrawals until after this period can help avoid financial aid reductions.
• Smaller Withdrawals Over Multiple Years: Spread out Roth IRA for Kids withdrawals to minimize the amount reported as untaxed income on the FAFSA.
• Leverage Other Savings First: Utilize accounts like 529 Plans, UGMA/UTMA accounts, or scholarships before turning to Roth IRA for Kids funds for education to preserve FAFSA eligibility and Roth IRA for Kids tax benefits.

Roth IRA for Kids vs. 529 Plans and UGMA/UTMA Accounts for Education

• Roth IRA for Kids: Flexible for non-educational use but impacts FAFSA.
• 529 Plan: Offers tax-free growth and minimal FAFSA impact but limited to educational expenses.
• UGMA/UTMA: Broad usage but significant FAFSA impact (up to 20% of account value).

By strategically timing withdrawals and understanding the differences between savings options, you can balance education funding needs while minimizing the impact on financial aid.

For more in-depth comparisons, check out our article ‘Roth IRA for Kids vs. 529 College Savings Plan vs. UGMA/UTMA Accounts.’

Medical Expenses: Using Roth IRA for Kids Funds as a Safety Net

Unexpected medical expenses can strain your family’s finances, but a Roth IRA for Kids offers a practical solution by allowing penalty-free withdrawals from earnings for qualifying medical costs. 

For parents managing their Roth IRA for Kids, understanding how this provision works ensures you can access funds during challenging times without compromising long-term savings growth.

How It Works: Contributions vs. Earnings

• Contributions: Always penalty-free and tax-free- these can be withdrawn at any time for any reason, including medical expenses.
• Earnings: Withdrawals from earnings are subject to stricter rules. Penalty-free withdrawals are allowed only if qualifying conditions are met:
  • Be paid in the same calendar year as the withdrawal.
  • Exceed 7.5% of your adjusted gross income (AGI).

 How It Works for Earnings (Step-by-Step):

1. Determine Your AGI: This is your total gross income minus specific deductions (e.g., student loan interest, and retirement contributions).
2. Calculate 7.5% of Your AGI: Multiply your AGI by 7.5%).
3. Subtract the Threshold from Total Medical Expenses: Take your unreimbursed medical expenses and subtract the 7.5% AGI threshold.
4. The Result is the Penalty-Free Withdrawal Amount: Any remaining amount qualifies for penalty-free withdrawal from the earnings portion of your Roth IRA for Kids.

Examples: How Roth IRA for Kids Medical Withdrawals Work

Example #1: Covering Hospital Bills

• Scenario: Your child has unexpected medical expenses of $12,000 from a hospital stay, and your AGI is $80,000.
• Step-by-Step Calculation:
  1. 7.5% of AGI: $80,000 × 0.075 = $6,000.
  2. Eligible Medical Expenses: $12,000 - $6,000 = $6,000.
  3. Penalty-Free Withdrawal Amount: $6,000 can be withdrawn from Roth IRA for Kids earnings penalty-free.

Example #2: Managing Therapy Costs

• Scenario: Your child requires ongoing therapy for a year, resulting in $20,000 in out-of-pocket costs. Your AGI is $150,000.
• Step-by-Step Calculation:
  1. 7.5% of AGI: $150,000 × 0.075 = $11,250.
  2. Eligible Medical Expenses: $20,000 - $11,250 = $8,750.
  3. Penalty-Free Withdrawal Amount: $8,750 can be withdrawn penalty-free from Roth IRA for Kids earnings.

Example #3: Covering Health Insurance Premiums During Unemployment

• Scenario: You’ve been unemployed for 12 consecutive weeks and need $5,000 to pay for your family’s health insurance premiums.
• How It Works: You can withdraw the full $5,000 penalty-free from Roth IRA for Kids earnings under the unemployment provision, even if your AGI doesn’t meet the 7.5% threshold for unreimbursed medical expenses.

This provision makes Roth IRA for Kids' a reliable safety net during health-related financial challenges, ensuring you can cover critical costs without sacrificing retirement growth.

Advantages and Drawbacks: Using a Roth IRA for Kids for Education and Medical Expenses

While Roth IRA for Kids' can provide financial flexibility, they should ideally be a last resort for education or medical expenses. Preserving their long-term growth potential is crucial for retirement savings. However, if needed, here are some advantages and drawbacks to consider.

Advantages:

• Reduced Need for Loans: Roth IRA for Kids funds can lower reliance on student loans or credit for medical bills.
• Tax-Free Growth: Contributions grow tax-free, providing long-term financial security.
• Penalty-Free Flexibility: Allows access to earnings for qualified needs without penalties.

Drawbacks:

• ‍Reduced Retirement Savings: Early withdrawals limit the compounding potential of long-term growth.‍
• FAFSA Impact: Education-related withdrawals count as income, potentially reducing financial aid.

Roth IRA for Kids' are best used as a secondary resource for education or medical expenses. Maximizing other savings options, like 529 Plans, ensures retirement funds remain untouched for future growth.

Why Choose a Roth IRA for Your Kids?

A Roth IRA for Kids is the ultimate retirement account for your child. Unlike regular investment accounts, a Roth IRA for Kids ensures both growth and future withdrawals are completely tax-free - making it one of the best tools available to build generational wealth for your kids.

Learn more about Roth IRA for Kids in our article ‘Why a Roth IRA is the best US Savings Account for Kids’.

How Mora Simplifies Roth IRA for Kids Planning

At Mora, we make navigating Roth IRA for Kids rules simple, helping families maximize their savings without unnecessary stress. Our services include:

• Expert Guidance: Tailored strategies for education and medical withdrawals.
• Compliance Assurance: Ensuring every withdrawal meets IRS requirements.
• Growth Maximization: Advice on balancing immediate needs with long-term goals.

Ready to secure your child’s future? Get in touch with the Mora team today and start making informed decisions with Mora’s expert support.

FAQs About Roth IRA for Kids Withdrawals for Education and Medical Expenses

Q: Can Roth IRA for Kids withdrawals cover any education expense?
Only qualified higher education expenses, like tuition, fees, and room and board (if enrolled half-time), are eligible for penalty-free earnings withdrawals.

Q: Do Roth IRA for Kids withdrawals for education affect financial aid?
Yes. They are considered untaxed income on FAFSA, potentially reducing eligibility for need-based aid.

Q: Are medical expenses always penalty-free?
Penalty-free withdrawals are allowed if unreimbursed medical expenses exceed 7.5% of AGI. Income tax may still apply.

Q: Does the five-year rule apply to medical and education withdrawals?
Yes, earnings withdrawn before the five-year mark are subject to income tax, even if penalty-free exceptions apply.

Ready to get started? Let Mora’s experts simplify the process. Contact us today!