Tax and Money Tip of the Week
Using IRAs to Cover College Expenses
September 12th, 2012 | No. 109

It’s time for college students to head back to school.  But how are you going to pay for this next year of college? Some people will be able to write the check.  But the majority of the population relies on loans, grants, scholarships, funds from family members and student earnings to cobble together enough money to pay the bills.  What if it isn’t enough? Can you use your retirement savings to help pay the bill?

First of all, consider whether you should use your retirement assets.  Are you putting your retirement at jeopardy to give your student a chance to have a good life?  Many advisors will tell you that you can borrow to pay for college, but you cannot borrow to pay your expenses in retirement.  The message is to look for all possible sources of cash before you consider using your retirement funds.

If you are over the age of 59 1/2, you have access to your retirement funds without penalty.  You will have to pay income tax on any distributions you take, but the retirement funds are now available for you to use as you wish.

A problem exists if you are under age 59 1/2 and are subject to the 10% early distribution penalty.  Fortunately, payment of higher education expenses is an exception to this penalty and the tax code is generous about applying this exception.  The IRA owner can pay for expenses for himself, his spouse, or the children or grandchildren of either the account owner or the spouse.  You can apply the exception to the unreimbursed payment of tuition, books, fees, supplies and required equipment – in other words, the expenses minus any financial aid.  Room and board are qualified expenses if the student is enrolled on at least a half-time basis.  The expenses must be paid in the same year that a distribution is taken from the IRA.

So good luck to all those students returning to college this fall.  And good luck to those that are footing the bill.  Use your retirement assets only as a last resort and don’t pay the early distribution penalty if you qualify for this exception!

Questions or Comments?

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Mark Vitek, CPA/PFS, CFP®
…until next week.