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Lane
Lane, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3717
Experience:  Providing Financial & Tax advice since 1986
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Hi all, I am going to be beginning my part-time MBA studies

Resolved Question:

Hi all,

I am going to be beginning my part-time MBA studies this fall. To pay for my MBA education, I plan to take out a loan and use part of my IRA funds. I have heard that you can take out IRA funds for educational purposes and only receive a 10% penalty (in addition to the normal tax rate. ) Given this, I am trying to understand what would be the optimal ratio between my loan and my IRA funds in order for me to receive the best tax refund.

Here is some more information:

Total MBA cost per year: Ard $75000 - Ex. I can take out a loan for 40k and get the 35k taken care of by my IRA funds.

I will also have high transportation costs as I will have to travel to school.

I'd be grateful for any advice you have for me.

Thanks!
Submitted: 11 months ago.
Category: Tax
Expert:  Lane replied 11 months ago.

Customer:

Hi,

Customer:

First of all I commend your efforts

Customer :

Thank you!

Customer:

Actually, the is an EXCEPTION to the IRA 10% if the withdrawal is for education

Customer:

As long as the withdrawal, in any tax year, is less than the total cost of tuition

Customer:

Here's what IRS says:

Customer:

Generally, if you take a distribution from your IRA before you reach age 59½, you must pay a 10% additional tax on the early distribution. This applies to any IRA you own, whether it is a traditional IRA (including a SEP-IRA), a Roth IRA, or a SIMPLE IRA. The additional tax on an early distribution from a SIMPLE IRA may be as high as 25%. See Publication 560, Retirement Plans for Small Business, for information on SEP-IRAs, and Publication 590, for information about all other IRAs.


However, you can take distributions from your IRAs for qualified higher education expenses without having to pay the 10% additional tax. You may owe income tax on at least part of the amount distributed, but you may not have to pay the 10% additional tax.

Customer:

and here's the link to IRS pub 970 section that deals with this: http://www.irs.gov/publications/p970/ch09.html

Customer:

What WILL happen, is the amount withdrawn will be added to your other taxable income for the year ... So, for example, if you have 10,000 of W-2 earnings in a yes and distribute 35,000, then you actually have 45,000 of taxable income for the year

Customer :

I see!

Customer:

SO, to get a feel for the COST of those funds you really have to look at your tax bracket and see what rate of tax you'll pay

Customer:

(the following year)

Customer :

My tax bracket would probably end up being over 100k then.

Customer :

it would be between 100k and 150k.

Customer :

with the withdrawl.

Customer:

Ok, now, the loans aren't taxed as income ... because those will need to be paid back... you're adding earning" (such as wages or 1099 independent contractor income?)

Customer :

Wages.

Customer:

ok

Customer:

Here are the brackets fort 2013

Customer:

  • 10% on taxable income from $0 to $8,925, plus

  • 15% on taxable income over $8,925 to $36,250, plus

  • 25% on taxable income over $36,250 to $87,850, plus

  • 28% on taxable income over $87,850 to $183,250, plus

  • 33% on taxable income over $183,250 to $398,350, plus

  • 35% on taxable income over $398,350 to $400,000, plus

Customer :

Yes, I would be in the 28% tax then.

Customer:

SO, you're squarely in the 28% bracket, so that incremental income from the ira...

Customer:

you got it

Customer:

There's the less quantifyable piece, however, that you won't need to pay back the IRA $

Customer :

hm..yes, that is right.

Customer:

"quantifiable"

Customer:

quantifiable, BUT gets complicated....because there's the opportunity cost of NOT havng thollars later for retirement

Customer:

AND

Customer :

in your opinion, what is better? With the loan, I will end up paying more if i take out more. And yes, if I do take out from my IRA, I get less.

Customer :

for retirement funds.

Customer:

the less quantifiable piece, (having less payments after you're done)

Customer:

Are you doing federal lending? (Federal student loans?)

Customer :

no..not currently.

Customer :

it would be a bank loan.

Customer:

Depending on your situation, you MAY still qualify for a graduate plus loan, as an independent , especially if you have any dependants, etc ... VERY low rates and fantaxtic payback schedules

Customer :

Do you know if I will also be able to deduct my transportation costs to school at the end of the year?

Customer:

Another option is somethingsecured with your home (tax deductible interest and relatively low rates)

Customer:

Hang on and I'll get the list

Customer :

okay thanks

Customer:


Qualified Education Expenses




For purposes of the tuition and fees deduction, qualified education expenses are tuition and certain related expenses required for enrollment or attendance at an eligible educational institution.


Eligible educational institution. An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. The educational institution should be able to tell you if it is an eligible educational institution.

 


Certain educational institutions located outside the United States also participate in the U.S. Department of Education's Federal Student Aid (FSA) programs.

 



Related expenses. Student-activity fees and expenses for course-related books, supplies, and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance.

 



Prepaid expenses. Qualified education expenses paid in 2012 for an academic period that begins in the first three months of 2013 can be used in figuring an education credit for 2012 only. See Academic period , earlier. For example, you pay $2,000 in December 2012 for qualified tuition for the 2013 winter quarter that begins in January 2013, you can use that $2,000 in figuring an education credit for 2012 only (if you meet all the other requirements).
Customer :

So does this mean my educational costs be used for the 2013 tax deduction?

Customer:

HOWEVER, you may get more bang for the buck by taking the lifetime learning tax CREDIT (a dollar of dollar reduction in tax, as opposed to the DEDUCTION from income for tax purposes, above

Customer:

Yes, if the costs are incurred IN 2013

Customer:

BUT first, see this:

Customer:

What is the tax benefit of the lifetime learning credit. For the tax year, you may be able to claim a lifetime learning credit of up to $2,000 for qualified education expenses paid for all eligible students. There is no limit on the number of years the lifetime learning credit can be claimed for each student.


 


A tax credit reduces the amount of income tax you may have to pay. Unlike a deduction, which reduces the amount of income subject to tax, a credit directly reduces the tax itself. The lifetime learning credit is a nonrefundable credit. This means that it can reduce your tax to zero, but if the credit is more than your tax the excess will not be refunded to you.


 


Your allowable lifetime learning credit may be limited by the amount of your income and the amount of your tax.

Customer:

Here's the information on the Lifetime learning credit: http://www.irs.gov/publications/p970/ch03.html#d0e2940

Customer :

ah..i see..Yes, the lifetime learning credit will be better for me.

Customer:

It usually, (Credit vs deduction)

Customer :

I guess after your discussion. I am leaning towards just taking a loan. and using the lifetime credit.

Customer:

IF you can do it that way, purely financially, it makes more semse (just not immediate gratification) ... Preserves that IRA, not only for retirement, but provides option for unexpected issues as well

Customer:

THink of the opportunity cost ... not only is the a hefty tax cost ... you're giving up the earnings on thos dollars as well

Customer :

yes, that is correct.

Customer:

I can tell you from experience that the MBA, if you stay in ANY kind of business or leadership at all, will pay rewards as well (both quantifiable AND provide options) which, as you will probably dig into, has a monetary value as well

Customer :

Thank you very muchCustomer Yes, I will certainly keep that in mind:).

Customer :

Good advice.

Customer:

Probably stating the obvious, but at 28% the benefit of a deduction is 28% (spend a dollar to save 28 cents) a tax credit is dollar for dollar .. just to get it out there

Customer:

THank you much and ENJOY, this can be a wonderful time you'll never forget

Customer :

Thanks againCustomer. That was very helpful.

Customer:

If this HAS helped, I would appreciate a feedback rating of 3 (OK) or better … That's the only way they will pay us here.


HOWEVER, if you need more on this, PLEASE COME BACK here, so you won't be charged for another question.

Customer :

Sure, definitely! I will come back if I have another question.

Customer:

Also, the links here will stay active ... feel free to bookmark and come back for reference

Customer:

Lane

Customer :

have a great day...i will do so.

Lane, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3717
Experience: Providing Financial & Tax advice since 1986
Lane and 6 other Tax Specialists are ready to help you
Expert:  Lane replied 11 months ago.


Thanks for the rating Nick!

If you'd like to work with ME again just say "For Lane only," at the beginning of your next question.


Thanks again,
Lane

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