Individual retirement accounts, or IRAs, are retirement savings options for people looking to supplement pensions or Social Security benefits. IRAs encourage people to save by allowing them to contribute pre-tax income, resulting in a significant savings boost compared to saving after-tax dollars. While the Internal Revenue Service does not allow you to borrow money from an IRA to pay for college, you may be able to take an early withdrawal from your account to cover tuition and related expenses.
How IRAs Work
An IRA is a tax-deferred investment savings account. Account holders deposit pre-tax dollars, then pay pay taxes on this money after retirement, when their tax bracket is typically lower. According to IRS Publication 590, any withdrawals from an IRA prior to age 59 1/2 are subject to a 10 percent penalty. Account holders must count these withdrawals as income, and pay taxes accordingly. As of 2010, people can contribute up to $5,000 per year to an IRA. Those over the age of 50 can invest as much as $6,000 annually.
Withdrawing Money from the IRA for College
You can't borrow from an IRA, like you can from a 401k. But you can elect to take an early distribution. According to the IRS Publication 590, account holders are not subject to the 10 percent early withdrawal penalty when these use IRA funds for three specific qualifying circumstances. These include paying for health insurance while unemployed, making a down payment on a primary residence or paying for college for themselves, a spouse, children or grandchildren. This means that you can withdraw money from your IRA to pay for college, though you will be subject to immediate taxation on these funds.
Withdrawals from a Roth IRA
A Roth IRA works slightly differently than a traditional IRA. These accounts allow people to invest after-tax income, then withdraw this money tax-free in retirement. You can take out money you have invested at any time and for any reason, and you will not be subject to any penalties or taxes. You may not withdraw earnings or interest on your investment until you reach the age of 59 1/2, however, without facing penalties.
Borrowing from Other Retirement Accounts
When it comes to paying for college, the majority of retirement plans represent a better option than withdrawing from an IRA. For example, according to the Internal Revenue Service, parents can borrow from a 401k or similar plan to pay for college without exposing themselves to penalties or additional taxes. Those who have some time to save before college should consider a state 529 plan, an Education IRA or a Roth IRA rather than a traditional IRA.
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