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
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, of http://www.investsafe.com is a retirement
plans specialist. InvestSafe.com covers various methods to
avoid or minimize taxes and penalties on early distributions
from retirement accounts.
Submitted by: Daniel Lamaute *
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