Higher education is very important for landing lucrative jobs. For many the challenge is finding the money for college. One piece of good news is that if you use money from an IRA to pay for education expenses the IRA account holder may qualify for a tax break.
Under the law, when you use a distribution from a traditional IRA or Rollover IRA to pay for educational expenses for you, your spouse, your children, or grandchildren, you may be exempt from the IRS imposed 10 percent early withdrawal penalty on the distribution.
As the account holder, you will have to claim the distribution amount as income on your federal income tax. While this could be a substantial amount, increasing your income, you will see a huge difference on the amount that you would have paid in interest if you were required to take out a personal loan to pay for college expenses.
To figure your savings, use any online payment calculator, entering the total amount of the IRA distribution as the principle amount and then add the current interest rates with a reasonable number of years that it would take to pay back this amount. Compare this to the taxes that you are going to pay in just one year and you can see a savings of hundreds if not thousands of dollars.
When figuring the amount that you need to use from your IRA a point to keep in mind is this: The amount that you use from your IRA is exempt when used for education but less the amount that is received in any tax free assistance, grants, or scholarships.
For example, if you use $30,000 from your IRA for qualified education expenses, but also received $1,000 grant and a $2,000 scholarship, you are liable for a 10 percent early withdrawal tax on $3,000 of your IRA distribution.
If you’ve worked for several companies over the years, you may have more than one 401(k) or retirement account still sitting with your old employers. To use this money for educational expenses you need to move this money into a Rollover IRA.
Be sure to ask your financial advisor how much the fees are for moving your 401(k) to a Rollover IRA and for accessing your IRA money. Sales charges could apply to the sale of mutual funds, as with any changes or transactions that take place involving your mutual funds.
Not only are you permitted to use this money for tuition fees involved with post secondary you can also use the money for other qualified expenses such as college fees, supplies, equipment, lab fees, books, and room and board. A post secondary education school includes a college, university, vocational school, graduate school, or a professional degree course.
Daniel Lamaute is CEO of InvestSafe.com a division of Lamaute Capital, Inc., an investment brokerage firm. Daniel has over 20 of experience in investment finance. He holds an MBA from Washington U in St. Louis, and advanced degrees from NYU and Harvard. For more information on Self-Employed 401(k)’s check out: http://www.investsafe.com
