Raiding an IRA for College

A question came from a reader over at about using her IRA to pay for her twins’ college expenses.  In part, she asks, “I am 50 years old, and I want to cash out and close my regular individual retirement account of $8,000 to use on educational expenses for my twin children who started college in September. Can I remove all the money now, or do I estimate what I think I may use and only make an IRA withdrawal for what’s needed for the current academic year?”

Dr. Don Taylor tells her it’s best to wait to their senior year since the withdrawal will be a part of her income in the tax year she takes them out which could effect the twins’ eligibility for financial aid.  However, he suggests not withdrawing from the IRA.  Assuming it’s a traditional plan, she’ll still owe taxes and in the 25% tax bracket, there will only be $6,000 left after taxes.  The only positive is that there wouldn’t be a 10% early withdrawal penalty since the money is being used for higher education.

“While I’m arguing that you not cash in the account now, if you were to make this move, you’d need to know more about the qualified higher education expenses that would allow you to use the IRA and not trigger the 10% penalty tax. Qualified higher education expenses are defined as tuition, fees, books, supplies and equipment required for the enrollment or attendance of a student at an eligible educational institution. They also can include room and board, if the student is enrolled at least half-time.

To spend money out of the IRA and avoid the penalty, you’d calculate the amount of eligible qualified expenses by subtracting college costs covered by any tax-free educational assistance, such as a Pell Grant or tax-free scholarship, a tax-free distribution from an education IRA or tax-free educational assistance provided by an employer”, says Dr. Taylor.

If you have any questions about this or other IRA situations, contact the tax experts at the IRA Financial Group today!

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