Can You Withdraw from Your IRA to Pay for Your Child’s Higher Education?

by | Jul 22, 2019 | Business News

 Although IRAs penalize account holders for pre-retirement withdrawals, special cases exist that do not require a penalty. One of the exceptions is college education. You can remove IRA funds for college expenses for a child, grandchild, spouse or yourself without penalty. This, however, will not exempt you from having to pay income taxes on the amount you withdraw because of the tax-deferred nature of an IRA plan.
The IRA treats Roth IRA’s differently because they are funded with post-tax dollars. Thus, you can withdraw money without having to pay income tax on the amount so long as your account has existed for at least five years. However, there are disadvantages including limitations on the amount you can withdraw.
Most college expenses do qualify for penalty immunity, however, you must use the funds for the year of the withdrawal. Eligible exemptions include tuition and administrative fees, books, equipment and supplies, and room and board, which requires a minimum of half-time enrollment. Not all colleges qualify, so you should check before removing any funds.
Should You Withdraw from Your IRA?
Consider that withdrawing funds from your IRA could place you in a higher tax bracket. In addition, the consequences of withdrawing money could affect your retirement.
Can You Use 401K Funds for College?
Yes, but should you? If you withdraw before you are 59 ½, you will likely owe a 10% premature distribution penalty and have to pay income tax on what you withdraw. Also, by removing funds, you lose the benefits of compounding and tax deferral on the amount removed from your plan. If your plan allows you to borrow, you might be better off to take this route.
Should you have questions concerning withdrawing money from your IRA, Roth IRA or 401 (k) plan, contact us.
Professional Tax Services is a locally owned provider serving over 3,500 local residents and businesses. For more information call 661-259-1967 or visit Through their complimentary EZ2 Thrive program, they provide unlimited free tax planning advice to their clients.

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