If you are looking for some education money for yourself or your
spouse, or your children or your grandchildren, and you have not
reached age 59½, consider a withdrawal from either your traditional IRA
or your Roth IRA, without having to pay the 10% additional tax penalty
on the withdrawal.
While you will still owe applicable federal
income taxes on the withdrawal distributions, this is an often
overlooked method of paying for eligible educational expenses.
According
to the IRS, "an eligible educational institution is any college,
university, vocational school, or other post-secondary educational
institute eligible to participate in a student aid program administered
by the Department of Education." Undergraduate and graduate courses are
both eligible. Even some foreign schools qualify. If you have any doubt
as to whether a school qualifies, it's best to contact the school.
Qualified
expenses for a student who is at least "half-time" are: (1) tuition,
(2) fees, books, supplies, and (3) equipment required for enrollment or
attendance at an eligible educational institution.
A Word of
Warning: Be careful of equipment as a qualified expense. It might be
useful to have a laptop computer, but check to see if it's actually
"required" for enrollment or attendance. The IRS has disallowed such
expenses in the past.
Room and board can also be a qualified
expense, but not more than the greater of actual amounts charged for
residing in housing owned or operated by the school or allowance for
room and board that was included in the cost of attendance.
To
determine expenses that are not subject to the 10% penalty requires
some calculations on your part. In essence, you must calculate your
"adjusted qualified educational expenses." You do this by reducing your
total "qualified education expenses" by any "tax-free educational
expenses." Tax free educational expenses include such things as
distributions from Coverdell educational savings accounts, tax-free
scholarships and fellowships, pell grants, veterans educational
assistance, and employer provide educational assistance.
If you receive any gifts or inheritances, these do not reduce your qualified educational expenses.
You
are not subject to the 10% penalty if your IRA distributions are equal
to or less than your adjusted qualified educational expenses.
As
you might expect, the IRS wants you to file Form 5329 to record your
early distributions. The instructions to file this form are on Part 1.
Before
we leave this subject, there’s a couple things to remember about Roth
IRAs. Earnings from your Roth IRA can be withdrawn tax-free if left in
the account for five years. If the earnings are withdrawn prior to five
years, they are included as income on your return.
You should
also note that a withdrawal from an IRA generally increases your income
for that year and may affect your eligibility for financial aid in the
future.
Lastly, remember that any withdrawal from an IRA is
eating into your retirement savings. This is often not in your best
interest.
For these reasons, you probably should explore other
ways of funding college expenses before opting for this method. You may
also want to discuss your personal financial situation with a tax
advisor.
Glenn ("Chip") Dahlke, a senior contributor to the Living Trust Network, has 28 years in the investment business.
He
is a Registered Representative of Linsco/Private Ledger and a principal
with Dahlke Financial Group. He is licensed to transact securities with
persons who are residents of the following states: CA. CT, FL, GA, IL.
MA, MD. ME, MI. NC, NH, NJ, NY.OR, PA, RI, VA, VT, WY.
If you have any questions or comments, Chip would love to hear from you. You may contact him at dahlkefinancial@sbcglobal.net. You may also contact him at the Living Trust Network. Its web site is http://www.livingtrustnetwork.com
Copyright 2006. Living Trust Network, LLC. All Rights Reserved
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