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Author: pssimon Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 8174  
Subject: Using a Roth IRA for education Date: 4/14/1998 12:48 PM
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I am trying a different approach for possible education funding.

I have openned a Roth IRA. If I never use it for education, its mine for retirement. IF I use it for education, as I understand it, it gets spent as if it wasn't an IRA; that is to say I can take money out without the addtional 10% penalty. I just have to pay tax on the money.

I figure I can't lose too badly with this approach. Does this have anyu merit, or have I screwed up my logic somewhere?

Thanks... Paul
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Author: PSUEngineerFool Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33 of 8174
Subject: Re: Using a Roth IRA for education Date: 4/14/1998 3:52 PM
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You have not screwed up the logic. The Roth IRA can be a good way to fund education.

And you don't have to pay tax on the contributions to the IRA, just on the earnings.

A good plan is for both you and your spouse to contribute $2000 per year to a Roth IRA. Potentially this can add up to $72,000 in contributions if done from birth of the child. Take the contributions out tax free at college time and leave the earnings in the Roth IRA for retirement.


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Author: TchrP Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34 of 8174
Subject: Re: Using a Roth IRA for education Date: 4/14/1998 6:22 PM
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>> I have openned a Roth IRA. If I never use it for education, its mine for retirement. IF I use it for education, as I understand it, it gets spent as if it wasn't an IRA; that is to say I can take money out without the addtional 10% penalty. I just have to pay
tax on the money.

I figure I can't lose too badly with this approach. Does this have anyu merit, or have I screwed up my logic somewhere?
--------------------
It's potentially a bit better than that. Not only are withdrawals for qualified educational expenses not subject to the penalty, but there is also no ordinary tax liability on the original *contributions*.

So, for example, if you contribute $2,000 to a Roth IRA, you can later withdraw $2,000 for qualifying expenses with no tax consequences whatsoever. Withdrawals that exceed your original contributions are, however, subject to tax as ordinary income unless you meet all the other Roth distribution requirements.

There are two genuine advantages to using a Roth for education savings. One is that you can contribute more per year to it, since the limit on an Education IRA is $500 per beneficiary. The other is that since it remains your money, not your child's, college financial-aid officials will have to view it differently. (And to my mind they shouldn't look at retirement investments at all, although if this strategy catches on, they probably will.)

A disadvantage is that the earnings will be taxed if they're withdrawn for educational expenses, while the proceeds of an Education IRA are completely tax-free. I would say that it makes some sense to use both, if you can. The same income limits apply for contributing to both.



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Author: RecoveringFool Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 35 of 8174
Subject: Re: Using a Roth IRA for education Date: 4/14/1998 6:40 PM
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<<(And to my mind they shouldn't look at retirement investments at all, although if
this strategy catches on, they probably will.)>>
As I recall, currently retirement accounts are not considered assets in the formula but this was undoubtably predicated on the difficulty of the parents getting to them. If they are available without tax cost to pay for education then my educated guess is that the cotributions on which taxes have been paid will be considered available assets (& isn't that really true)

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Author: galtsgulch One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 44 of 8174
Subject: Re: Using a Roth IRA for education Date: 4/17/1998 11:33 AM
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<< Not only are withdrawals for qualified educational expenses not subject to the penalty, but there is also no ordinary tax liability on the original *contributions*. >>

That sounds great, but are you sure about this? I thought (I hope I'm mistaken) that you did have to pay the tax. From the IRS web site….

http://www.irs.ustreas.gov/plain/hot/not97-604.html

Beginning January 1, 1998, a taxpayer may make withdrawals from an individual retirement account (IRA) to pay the qualified higher education expenses for the taxpayer, the taxpayer's spouse, or the child or grandchild of the taxpayer or taxpayer's spouse at an eligible educational institution. The taxpayer will owe federal income tax on the amount withdrawn, but will not be subject to the 10 percent early withdrawal tax that applies when amounts are withdrawn from an individual retirement account before the account holder reaches age 59 ½.

As I've come to expect, the IRS doesn't make it clear if they are talking about the roth IRA or the ordinary IRA or both. Can you point me to source that confirms your claim?


Thanks,
John Power

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Author: TchrP Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 45 of 8174
Subject: Re: Using a Roth IRA for education Date: 4/17/1998 1:31 PM
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>> As I've come to expect, the IRS doesn't make it clear if they are talking about the roth IRA or the ordinary IRA or both. Can you point me to source that confirms your claim?
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My immediate source was a booklet that I received from my broker. I can come to the same conclusion from pertinent sections of several different IRS publications, but if you require citations from the IRS code, I think you should consult a tax lawyer, which I am not.

I read the passage you quoted as incomplete, because it doesn't take into account the possibility of non-deductible contributions to an IRA. All Roth contributions are non-deductible.



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Author: SnootFool Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 46 of 8174
Subject: Re: Using a Roth IRA for education Date: 4/18/1998 1:00 AM
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I also think the IRS page you quoted was not detailed enough regarding tax liability for Roth withdrawals for educational purposes. IOW, TchrP is correct. Since your Roth contributions are non-deductible, you pay tax on them when they go IN the IRA. As such, you are able to withdraw them *tax-free* (no second tax bite, not even the IRS is that mean!). I'm not 100% sure how traditional IRA withdrawals of nondeductible contributions for education are treated WRT taxes but believe same logic applies. If you have questions, by all means visit KAT's website which is a veritable cornucopia of IRA & tax info: http://www.fairmark.com/

In related Roth news, Roth withdrawals for home buyers are *completely* tax-free, whether you withdraw contributions or earnings! The only caveat: a lifetime $10K ceiling on these withdrawals.

In general, I would not plan for a Roth IRA to be the prime source of college funds simply because of the impact on future IRA earnings of withdrawing that much money ($100K+ *today* for top-tier private college!) from the account. Depending on number of kids, age etc., this could reduce you to eating ALPO in golden years. <g>
Due to 2K limit per IRA, you need to look at maxing out contributions to a taxable stock account too, using long holding periods to minimize cap gains, etc. Need to be aggressive NOW because 3/5/7 years (exact number depends on your own sense of stock mkt as 'safe' place for $ you WILL need relatively soon) before freshman year, you'll need to salt that $ away where low risk of loss allows you to sleep nights.
Or, just tell kids to apply for ROTC/Military Academy Scholarships!
Pls excuse verbosity... ;)

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