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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121061  
Subject: Re: withdrawal for ira Date: 10/7/1997 11:25 AM
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<<for a traditional ira in 98, is the 10 %penalty waived if i take proceeds and pay off my college loan? i am under 59-
i know i can use it for tuition but i have not read anything for college loans. thanks tony curatolo>>

Sorry, Tony, but the answer is no.

While TRA '97 provided for a few "penalty free" IRA withdrawals (Roth rollovers, first time homebuyer, higher education expenses), there is no penalty free waiver to pay off college loans.

The penalty free provision for higher education allows that in 1998, IRA withdrawals will be penalty free if the proceeds are used to pay higher education expenses. Of course, the withdrawal will still be subject to regular taxes. Qualified higher education expenses iinclude tuition at an eligible post-secondary educational institution, as well as room and board, fees, books, supplies, and equipment required for enrollment or attendance. Expenses for graduate level courses are also covered.

But, take heart...if you are no longer in school and are simply paying off your existing student loan, know that TRA '97 added a deduction for interest paid on higher education loans. Starting in 1998, you'll be able to deduct interest that you pay on a loan that was used to pay tuition, room and board, and related expenses for attending post-secondary schools, including some vocational and postgraduate schools.
The deduction is limited to $1,000 in interst paid in 1998, but this will gradually increase to $2,500 per year in 2001. But the deduction is phased out for taxpayers with income above certain limits. There are other limits that you should be aware of (especially the 60 month limitation...in which only the interest paid during the first 60 months of the loan are allowable for the deduction).

The beauty of this deduction is that is is allowed "above the line", which means that if you qualify for this deduction, you'll be able to take it even if you don't itemize your deductions.

So if this is of more interest to you, contact your lender. They will probably have ALL of the information that you will need to review this deduction based upon your individual situation. And if you have any additional questions, feel free to post 'em here.

TMF Taxes
Roy
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