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Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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I am an independent student returning to university after two

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I am an independent student returning to university after two years of well-paid work. I have $5500 in cash and $9000 in a traditional IRA. My expected outlay for my studies will be ~$2700 a year tuition for the two years remaining to finish my degree, with ~$5000 a year or so for rent in a small apartment. I intend to take a part-time job to pay for food and other miscellaneous expenses. I have also been offered a non-subsidized loan in the amount of $12,000 payable in
$3,000 per semester by my school, at the interest rate of 6.8%.

My question hinges on whether I should take the school up on the offered money. I have hesitated to invest my IRA in anything non-liquid in the expectation that I would use the money to pay for school. I put $4000 in FY 2007 and $5000 in FY 2008. Is removing money for this purpose difficult or time consuming?

Removing money from your IRA account is not difficult, regardless of the purpose for the withdrawal. It is simply a matter of making a withdrawal request with the financial institution that holds your IRA account and having them issue you a check.

If you will be using the money for higher educational purposes, then you would not owe the 10% early withdrawal penalty, which would normally apply to withdrawals made prior to age 59-1/2. But you would still owe income tax on the amount withdrawn. The actual tax you end up owing will depend on your overall income for the year, as that what determines the tax bracket you are in. If you only plan to have a part time job, then chances are your income tax bracket will only be 10%.

There are both pros and cons to taking the money out of your IRA for these expenses. Obviously the positive side is that you would not have a loan to worry about repaying. And with the market being in a depressed state right now, it would be difficult to imagine that your IRA account could earn anywhere close to 6.8% if you are keeping this in liquid investments such as money markets or short term CD's. So from that standpoint it would be better to use money from your IRA, since it is not earning as much as the interest you would be charged on the loan.

On the other hand, any time that you take money out of your IRA account, it is money that you cannot replace, except by making additional contributions in future years. But you cannot go back and re-contribute money for prior years. The more you can keep in your IRA, the better off you are for the future, if you are considered at this point about planning for your retirement. Even though the market is not doing very well right now, it should eventually rebound. When it does, the more money you have in your IRA account, the more you stand to gain, as all of those earnings will be tax deferred.

But getting back to your original question of whether or not this money is difficult to withdraw, it is not difficult at all. You just need to make the withdrawal request and have your IRA custodian issue you the check. If your IRA is with a local bank or with an investment firm that has a local branch office in your area, you should be able to get the check the same day as you make the withdrawal request.

If this was helpful please press the Accept button. Positive feedback is also appreciated.

Thank you Marloe.

Customer: replied 8 years ago.
Well, I suppose I need to more answers. First, what types of expenses constitute "Higher Education" expenses? Would my rent or food qualify? Second, If I were to accept the loan, I would highly consider moving the money into a Roth IRA and there invest it in something with considerably higher interest if possible. Is it possible for that investment to be wiser than just draining my IRA account for my education?
Hello again Marloe,

Qualified higher education expenses would include the cost of your tuition, books and required fees, but would not include the cost of your rent or food or any other living expenses. So if the amount you withdrew from your IRA account exceeded the allowed expenses of tuition, books and fees, then you would also pay an early withdrawal penalty on the excess amount of 10%. So that is something you should most definitely try to avoid if you possibly can.

Rolling your traditional IRA in to a Roth IRA is always a huge plus, particularly since you are younger and have so many years ahead of you to let that account grow. You would of course pay the taxes on the amount you roll over to the Roth, but once that is done, that Roth account that continues to grow tax free, and you never pay another dime in tax on any of the earnings. The Roth IRA is one of the best things that Congress ever made available to taxpayers, so if you can possibly take advantage of that, then by all means you should do so.

If you take that money out of your IRA account now and roll it over to a Roth, while you are only working part time, you will be in a very low tax bracket, and should not have to pay much tax on the rollver. So let's just say as an example that you are in the 10% tax bracket and you take out the $9,000 you have to roll over to a Roth. It would cost you $900 in tax to do that. The average investor can double his money in the stock market in 7 years. That means that 18 years from now your $9,000 may be worth $140,000, and that is all tax free money. You never pay another dime in tax over the $900 it cost you to roll over the funds.

If you can possibly survive without using that money for your tuition or living expenses, that is definitely the way you would want to go.

If this was helpful please press the Accept button. Positive feedback is also appreciated.

Thankyou Marlo.

Merlo and 6 other Tax Specialists are ready to help you
I just saw a typo in my last response

The sentence should have read "28 years from now your $9,000 may be worth $140,000"

That's still a nice return!