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I'm considering my options on how to pay for my final year of grad school.
One option I have considered is using my IRA to pay for fall tuition, instead of taking out a student loan.

What are the IRA/tax considerations that I need to consider for this?

I have paid for summer classes using my savings, and the amount I have already paid exceeds the $4000 tuition and fees reduction mentioned in
http://www.irs.gov/publications/p970/ch06.html
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I'm considering my options on how to pay for my final year of grad school.
One option I have considered is using my IRA to pay for fall tuition, instead of taking out a student loan.

What are the IRA/tax considerations that I need to consider for this?


Assuming this is a traditional IRA and you've never made after-tax contributions, the distribution will be fully taxable. However, the premature distribution penalty is waived, within limits. See Pub 590.

I have paid for summer classes using my savings, and the amount I have already paid exceeds the $4000 tuition and fees reduction

If you're in the 15% bracket or below the Lifetime Learning Credit might be a better deal. See Pub 970 for details.

Phil
Rule Your Retirement Home Fool
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Thanks for the response, Phil.
I think I will be in the the 15% bracket or below, due to my generally impoverished status as a student, so the Lifetime Learning Credit might be the way to go.
Now I probably need to figure out what my total taxable 2012 income would be if I took the amount I paid for summer school out in the same distribution from my IRA-- it would be nice to have that amount of money in the "rainy day" fund since I won't have much actual income for a while.
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My son is in grad school, and for his final year I would encourage him to use student loans rather than tap his IRA, because:

- Once money's taken out of an IRA, it can't be put back. When he's at the point he can contribute again, better to add to an existing amount than start from scratch.

- Once the loan is paid back, he'll have no loan plus an IRA, whereas if he'd used the IRA, he'll have no loan and no IRA.

- A student loan might help his credit score, which at the moment is based entirely on his credit card usage (he has no other loans). (Which reminds me, he should check his credit report anyway, www.annualcreditreport.com )

- Regarding "rainy day" fund, after graduation, in the event of a true emergency, he could use his IRA then (it's a Roth he's had over 5 years, so no penalties).

YMMV.
Meanwhile, Phil, thanks for the Lifetime Learning Credit info, I'll have him look into that.
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Thanks for the input on this, YewGuise. I am definitely planning on leaving my Roth untouched-- the IRA I was considering using is a traditional one.
The reason I want to avoid using the student loans is that the rates aren't very good, and my income level last year prevented me from getting a subsidized loan, so interest would be accruing immediately.
Lots to consider...
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Thanks for the input on this, YewGuise. I am definitely planning on leaving my Roth untouched-- the IRA I was considering using is a traditional one.

Because of the taxes penalties, I would strongly suggest pulling from a Roth IRA prior to pulling from a traditional IRA, up to the amount that you have contributed to the Roth. Those withdrawals would be both tax free and penalty free.

Only after you have withdrawan all of your contributions from the Roth would I suggest withdrawing from the traditional IRA.

If you really want to keep the Roth at the same asset level, you can always convert the withdrawn amount from the traditional IRA. This will avoid the penalties.

The reason I want to avoid using the student loans is that the rates aren't very good, and my income level last year prevented me from getting a subsidized loan, so interest would be accruing immediately.

So, for an unsubsidized loan for your last year of grad school, compared to a subsidized loan, you would end up accruing 6.8% interest for 18 additional months, or a total of 10.2% additional interest paid. You will spend almost as much in the penalty, not even counting the tax rate.

And a rate of 6.8% for an unsecured signature loan is still a pretty good rate, IMO.

AJ
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I appreciate the comments, AJ.
I don't think there will really be any penalties for the withdrawal, because the 10% penalty is waived if the money is used for tuition. My income level is so low this year that I don't think I will owe income tax. (This might be a good time for me to convert some of the traditional IRA to the Roth. I'm trying to figure that out, also.)
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I'm way past the time where I had to consider the cost of putting my son through college, which I gladly did. That said, I think taking out student loans, which usually doesn't charge interest while you're in school, might be the better thing to do. When you graduate and need to start paying (plus incurring interest), then you might want to consider hitting your retirement accounts to pay the loans off. For now, you have a shot at what amounts to interest free loans, at least for so long as you remain in school. Just an idea, and I also might be wrong about all of this. Good luck.
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Thanks, ResNullius (I dig the Latin name, by the way).
The student loans I have been offered are not subsidized due to my income level last year, so the interest starts accruing immediately if I take them. Additionally, there is an upfront fee that is taken out of each loan disbursement.
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Phil,
One more question--
Does taking the traditional IRA distribution without getting the 10% penalty affect the other tax advantages associated with college tuition (Tuition and Fees deduction/Lifetime Learning Credit)?
I couldn't find any mention of that situation in pubs 970 or 590, but it kind of seems like "double dipping" on the tax advantages.
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When you graduate and need to start paying (plus incurring interest), then you might want to consider hitting your retirement accounts to pay the loans off.

The tax cost of doing that is that repayment of loans isn't a "qualified" expense that avoids the premature distribution penalty, so unless you did it in the tax year you paid tuition you'd get hit for the penalty.

Phil
Rule Your Retirement Home Fool
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Does taking the traditional IRA distribution without getting the 10% penalty affect the other tax advantages associated with college tuition (Tuition and Fees deduction/Lifetime Learning Credit)?

No. You must reduce your gross expenses by any tax-free benefits such as scholarships or employer assistance, but you can use the same expenses for both avoiding the penalty and as a basis for the deduction/credit.

Phil
Rule Your Retirement Home Fool
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Thanks again, Phil.
I really appreciate you taking the time to help me make a better informed decision.
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