Why is a Roth Individual Retirement Account (IRA) considered valuable when saving for college expenses?

• A. Roth IRAs have no contribution limits, allowing unlimited savings for college.
• B. Qualified withdrawals from a Roth IRA, including earnings, can be made tax-free if certain conditions are met.
• C. Withdrawals from a Roth IRA for college expenses are always penalty-free, regardless of age or account status.
• D. Contributions to a Roth IRA are tax-deductible in the year they are made.

Answer: (B)

Verified step by step guidance

1. Understand the concept of a Roth IRA: A Roth IRA is a type of retirement account where contributions are made with after-tax dollars, and qualified withdrawals are tax-free under certain conditions.
2. Identify the key feature relevant to college savings: Qualified withdrawals from a Roth IRA, including earnings, can be made tax-free if specific conditions are met, such as the account being open for at least five years and the withdrawal being for a qualified expense.
3. Clarify the misconception about contribution limits: Roth IRAs do have annual contribution limits set by the IRS, which are adjusted periodically. These limits apply regardless of the purpose of the savings, including college expenses.
4. Explain the penalty-free withdrawal rule: While contributions to a Roth IRA can be withdrawn at any time without penalties, earnings may be subject to penalties and taxes unless the withdrawal meets the criteria for a qualified distribution, such as for college expenses.
5. Address the tax-deductibility misunderstanding: Contributions to a Roth IRA are not tax-deductible in the year they are made. This is a key distinction from traditional IRAs, where contributions may be tax-deductible.