You can use IRA funds to pay for your kids' college. The 10% premature distribution penalty (which usually applies if you take money out before age 59-1/2) won’t apply to those taking money out to pay college expenses. But you may still owe income tax on the withdrawal. If you received a tax benefit (deduction) the withdrawal will be taxable. If you were not able to deduct it, then the withdrawal will be tax free. We aren’t talking about what used to be called "education IRAs,” (now known as Coverdell Education Savings Accounts, or Coverdell ESAs) which are specifically designed to pay college expenses. We’re talking about pulling money out of retirement-oriented IRAs to pay tuition. Tip: Money that’s in an IRA grows at a higher rate because there is no current tax on the growth. It’s important to leave the money in the IRA for as long as possible in order to get the most from that tax-privileged status. By the way, with Coverdell Education Savings Accounts, contributions are limited to $2,000 per child per year. The contributions aren't tax-deductible, but money withdrawn from those accounts to pay for qualifying higher-education expenses will completely escape federal tax. So the education IRA is a good college-savings vehicle, though maybe not the only vehicle for your case. What about money taken out of a Roth IRA (the non-deductible type of IRA) and used to pay for education? Roth IRA withdrawals are tax-free to the extent of prior nondeductible contributions, and you will escape the 10% penalty. Earnings withdrawn in excess of that can be taxable (and subject to the 10% penalty). But even earnings can come out of a Roth IRA tax-free if the account has been open for at least five years and you are at least 59-1/2 (or disabled). |
