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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
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Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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My daughter was the victim of outsourcing by IBM. Not being

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My daughter was the victim of outsourcing by IBM. Not being able to find a job she enrolled in Law School and has become a lawyer but jobs are not available. She has about $100 K of Student loan debt and her health insurance is about $600/month. She does have about $200,000 in IRA's. She is now working at a Nursing Home for
$11.00 /hr. But the longer she holds off paying her loans the more debt she incurs. Can she use the IRA's without serious penalties?
Submitted: 10 months ago.
Category: Tax
Expert:  Tax.appeal.168 replied 10 months ago.
Welcome. Thank you for choosing this Q&A service today. My name is XXXXX XXXXX my goal is to help make YOUR life, a little...LESS taxing.

Q: Can she use the IRA's without serious penalties?

A: Note that the withdrawal will be considered as taxable income whether an exception applies or not. If an exception (I'll address shortly), does not apply, an additional 10% penalty will apply.

Withdrawal rules for Traditional IRAs

With Traditional IRAs, you defer taxes until you begin to withdraw money. The rules vary depending on your age.

Withdrawals prior to age 59½

Distributions from Traditional IRAs prior to age 59½ are subject to a 10% penalty, in addition to applicable federal and state taxes. Under the following circumstances, you may be able to avoid the penalty on early withdrawals:

First-time home purchase
Qualified education expenses
Death or disability
Unreimbursed medical expenses
Health insurance, if you’re unemployed

------------------------------------

For the purposes of the IRA withdrawal, the student loan payments does qualify as "Qualified education expenses". SEE BELOW:

Qualified education expenses. For purposes of the 10% additional tax, these expenses are tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution. They also include expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance.

In addition, if the student is at least a half-time student, room and board are qualified education expenses.

The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts.
The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.

The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.

REFERENCE SOURCE:

http://www.irs.gov/publications/p970/ch09.html

This may not be the answer that you were hoping for, and I do wish that I could provide you with a more favorable answer.

Please let me know if I can be of further assistance to you regarding this matter.

As we know that you have choices, again, we thank you for choosing this Q&A service today.
Customer: replied 10 months ago.

I take it to understand that her Loan payments are a deductible Educational Expense, Correct?

Expert:  Lane replied 10 months ago.


No her student loan INTEREST is deductible, (the repayment of money that she was loaned and had the use of, is never deductible ... in ANY situation)

But, again her COST for borrowing that money (the interest) IS deductible. (for the same policy reasons that mortgage interest is deductible... the interest is the cost of borrowing)

 



See this from IRS:

Topic 456 - Student Loan Interest Deduction

You may be able to deduct interest you pay on a qualified student loan. Generally, the amount you may deduct is the lesser of $2,500 or the amount of interest you actually paid.

The deduction is claimed as an adjustment to income so you do not need to itemize your deductions onForm 1040, Schedule A(PDF).

And finally, as the previous expert mentioned, the 10% penalty for pulling tax advantaged retirement money from an IRA IS waived for qualified educational expenses (which this is), but if this was pre-tax money that was used to create the IRA, the dollars that come out will be added to her taxable income for the year (as they have never been taxed.

Here's the link to the IRS guidance regarding the student loan interest:

http://www.irs.gov/taxtopics/tc456.html

Hope this helps

Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3747
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 3 other Tax Specialists are ready to help you
Customer: replied 10 months ago.

This seems to make more sense. Thank you.


Mike

Expert:  Tax.appeal.168 replied 10 months ago.
What makes more sense? I correctly answered the question that you asked and you rated my answer poorly. As the other expert's answer seems to make more sense to you, I do hope that you rate his answer positively.

Agan, thank you for using this Q&A service.
Expert:  Lane replied 10 months ago.

Hi Mike,

Just looked back and saws the rating...

Thanks

Glad we got ya there.

Lane

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