For those who are making a plan for their financial future, it’s essential to know all the available resources. One such resource that can help ease the financial burden of college is an individual retirement account (IRA). Often, IRAs are seen as a vehicle for retirement savings, but it’s also a smart way to save for education expenses. Here is how to use your IRA to pay for college education.
1. Evaluate your IRA type
Firstly, figure out which IRA account you have. Traditional IRA will charge a 10% early withdrawal penalty if you withdraw funds before turning 59.5, but Roth IRA allows penalty-free withdrawals of contribution made earlier. Depending on the account type, you might need to make some changes to prevent unnecessary charges.
2. Check for educational expenses covered
The IRS has specific rules on what qualifies as educational expenses. These can include tuition fees, room and board expenses, textbooks, and other related costs. Still, it’s crucial to confirm with your school if your IRA withdrawal counts as a qualified distribution for educational expenses.
3. Determine the amount you want to withdraw
You need to account for how much you will need to cover tuition and other college-related fees. Once you have an estimate, you can withdraw the amount needed from your IRA account. Keep in mind that for traditional IRAs, the amount taken out is viewed as ordinary income and is taxable, so take that into consideration when calculating how much you need.
4. Make sure it’s a qualified distribution
To avoid penalties and taxes, a distribution from your IRA must be qualified. A qualified distribution is one used to fund qualified education expenses such as tuition, books, and fees. Typically, you’ll need to provide documentation to your IRA custodian that the distribution is qualified.
5. Follow the withdrawal rules
Finally, ensure you follow the rules for making withdrawals from your IRA. Early withdrawals from a traditional IRA will usually incur a penalty unless it’s for qualified educational expenses. Roth IRAs have no penalty for withdrawing contribution previously made, but earnings may be subject to ordinary income tax plus a 10% penalty if not withdrawn correctly.
In summary, using an IRA to pay for college expenses is a viable option for those looking for ways to fund education costs. It’s crucial to evaluate the type of IRA account you have, confirm educational expenses covered, determine the amount you want to withdraw, verify the distribution as qualified, and follow IRA withdrawal rules. With proper planning, you can make the most of your IRA account to pay for education expenses.