Withdrawing from IRA to Pay for College
I am 56 years and have a college going child, who will graduate in 2 years. I have been paying college expenses from my tax paid cash account.
I am contemplating withdrawing money from my IRA and paying college expenses for another 2 years.
I understand that when I withdraw from IRA – the amount will be taxable ( but no PENALTY ). If I let the money in IRA grow – though it will compound , but when I withdraw – it will be taxed at regular income tax rate.
Instead – if I invest using my tax paid cash account, all long terms gains will be taxed at long term capital gains rate, which is much lower than the rate on regular income.
How does my strategy sounds ?
Permalink Submitted by Alan - IRA critic on Fri, 2020-02-21 02:41
All true regarding the tax rules. However, if you pay the college expenses from your taxable (brokerage?) account, you may have to sell and pay cap gains now and your IRA will balance will be higher. If you withdraw from the IRA you pay ordinary income rates now, and your taxable account is not reduced. Therefore, the lower taxes now produces higher taxes later from RMDs and vice versa. They get you now or later. Of course, you could split the college costs between both accounts and create a balance.
Permalink Submitted by David Mertz on Fri, 2020-02-21 02:41
Use the money from the tax-paid cash account to pay for college (and taxes) and convert to Roth the amount that you would otherwise have withdrawn from the IRA. All of the earnings in the Roth IRA will be entirely tax free once you’ve had a Roth IRA for 5 years and have also reached age 59½, rather than being taxable at the long-term capital gains rate. The only caveat is that if you take any of the converted amount or the earnings out of the Roth IRA before age 59½ it will be subject to an early-distribution penalty.