September Key Focus
Using IRAs to Cover College Expenses
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!