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Greetings everyone,

My question concerns early Roth IRA distributions to be used for education expenses. Can only my contributions be withdrawn tax and penalty-free or can I withdraw the EARNINGS as well tax and penalty-free. Thanks in advance and thanks in general to everyone for a very helpful forum!
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olivesforpants,

Nice name, by-the-way.

You can take out your contributions from a Roth IRA without penalty. You cannot take out your earnings unless you pay a 10% penalty.

JLP

http://AllThingsFinancial.blogspot.com
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Thanks for the quick response JLP! I'm glad you like my moniker. Does this mean that I pay only the 10% on the earnings or are fed income taxes applied too?

Thanks again.
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The earnings would be subject to a 10% penalty and taxes. It is best not to touch them if you don't have to.

JLP

http://AllThingsFinancial.blogspot.com
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You can take out your contributions from a Roth IRA without penalty. You cannot take out your earnings unless you pay a 10% penalty.

I believe this is incorrect :
http://www.irs.gov/pub/irs-pdf/p590.pdf
See page 58

The penalty is not assessed if the distributions are not more than your higherr education expenses.

rad
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I believe this is incorrect :
http://www.irs.gov/pub/irs-pdf/p590.pdf
See page 58

I read that as well. It just doesn't specifically say that contributions and earnings are free from the 10% penalty. Assuming they are, would the earnings be subject to income tax as that money will have never been taxed at all?

Thanks for your thoughts.

ofp
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I read that as well. It just doesn't specifically say that contributions and earnings are free from the 10% penalty. Assuming they are, would the earnings be subject to income tax as that money will have never been taxed at all?

I looked up the pub and gave you the reference. At this point, you should probably consult with a tax professional prior to removing the money from a Roth if the publication doesn't answer your questions.

rad
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I don't know how I missed that. I read through that dang publication before I commented. However, from what I read, the money must be in the IRA at least 5 years.

Sorry about that. I always try to post correct information.

JLP

PS - Olivesforpants, are you SURE you want to take money out for school? Is there another way to pay for it without touching your IRA? How old are you? Have you calculated the opportunity cost for taking money out of the Roth? Just a few things for you to consider. - JLP

http://AllThingsFinancial.blogspot.com
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Greetings, olivesforpants, and welcome. You asked:

My question concerns early Roth IRA distributions to be used for education expenses. Can only my contributions be withdrawn tax and penalty-free or can I withdraw the EARNINGS as well tax and penalty-free.

This thread seems to bounce around the correct answer, so let's see if we can't clear things up a bit.

You may take your annual contribution money from a Roth IRA at any time for any purpose without paying taxes or the 10% early withdrawal excise tax/penalty. When you have exhausted those contributions, then you may take the earnings on those contributions to fund your qualified education expenses without having to pay the 10% excise tax (penalty) for an early distribution; however, because such a withdrawal is NOT one of the Roth IRA qualified distributions that escape income taxes, you still must pay income taxes on that money. It makes no difference how long the Roth IRA has been opened because the use of IRA money to pay for qualified higher education expenses is one of the allowable early withdrawal exceptions that will escape the 10% early withdrawal penalty. Just as in a traditional IRA, though, you must pay income taxes on the withdrawal.

Hope that helps some.

Regards...Pixy
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Thanks everyone.

...however, because such a withdrawal is NOT one of the Roth IRA qualified distributions that escape income taxes, you still must pay income taxes on that money.


Pixy, that does clear things up a bit.


To answer your question JLP, I'm 27. I'm getting married this July and I'm exploring ways to pay down my future wife's grad school loans (approx $150k by 2010). The idea of completely untaxed earnings seemed too good to be true and it looks like it is.

I appreciate all the prompt help!

ofp
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olivesforpants: "To answer your question JLP, I'm 27. I'm getting married this July and I'm exploring ways to pay down my future wife's grad school loans (approx $150k by 2010). The idea of completely untaxed earnings seemed too good to be true and it looks like it is."

You are switching horses in mid-stream, and probably do not even realize it.

Your OP stated: {{{My question concerns early Roth IRA distributions to be used for education expenses. Can only my contributions be withdrawn tax and penalty-free or can I withdraw the EARNINGS as well tax and penalty-free.}}}

I strongly suspect that everyone who responded previously understood "educational expenses" to mean current payments for education, and responded accordingly.

IIRC, repayment of student loans is not "education expenses" for purposes of allowed use of IRA funds.

Regards, JAFO

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I strongly suspect that everyone who responded previously understood "educational expenses" to mean current payments for education, and responded accordingly.

Argh - good catch JAFO

rad
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IIRC, repayment of student loans is not "education expenses" for purposes of allowed use of IRA funds.


Ahh, I see. Perhaps I was getting ahead of myself. I assumed that student loan repayment qualified as education expenses. I haven't pored over the IRS pubs exhaustively but so far though I haven't found an explicit definition of education expenses. Thanks for pointing this out Jafo. Did you get your information online?

Best,

ofp
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Pub 970 has a section on qualified higher education expenses in each section :
http://www.irs.gov/publications/p970/index.html including the one on early IRA distributions.

This really isn't rocket science. For all the garbage heaped on the IRA, there is good information in the publications if you take the time to actually read them. I found this by putting "qualified higher education expenses" into the search box at the IRS site.

rad
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olivesforpants:

<<<<IIRC, repayment of student loans is not "education expenses" for purposes of allowed use of IRA funds.>>>>

"Ahh, I see. Perhaps I was getting ahead of myself. I assumed that student loan repayment qualified as education expenses. I haven't pored over the IRS pubs exhaustively but so far though I haven't found an explicit definition of education expenses."

I am certain one exists.

"Thanks for pointing this out Jafo. Did you get your information online?"

Probably. Rad and nellie (LakersFan) are the resident financial aid experts. The real tax gurus frequent the Tax board and some of them frequent some other boards.

If you really want to know, I would first review the FAQ on the Tax Board, then check out www.Fairmark.com (one of the best tax sites on the Web, for the issues it covers), and if still not identified, ask on the Tax board.

A quick google located this:

http://www.irs.gov/publications/p970/

Subpart 9 WRT to IRAs defines Qualified education expenses as follows:

"For purposes of the 10% additional tax, these expenses are tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution. They also include expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance."

It does not say anything about repaying loans!

Regards, JAFO
(not a tax guru)




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Thanks Rad, Jafo. Very helpful information. I should have perused the IRS publications more thoroughly in the first place!

best,

ofp
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