Early Distribution from Roth vs. Regular IRA
Is there any benefit to converting an IRA to a Roth IRA as far as early distributions go? I have a client that is 36 years old and she is considering doing the Roth Conversion with her IRA but she may need to use the funds in the account for higher education down the road. She is wondering if there will be any advantages or disadvantages to converting her IRA to a Roth as it relates to paying higher education expenses.
Permalink Submitted by Alan Spross on Tue, 2009-03-10 19:52
There actually could be a slight disadvantage to conversion. If we assume that the education expenses are qualified for the penalty exception, it removes the penalty as a factor either way. However, if she converts now she could be paying a higher tax rate on the conversion than if she just takes the education expenses from her TIRA if her income will be down during the education period. In addition, education tax credits could assist with the taxes that are payable during the eduction period.
If none of the above applies, then the conversion should exclude the higher education factor unless over the long haul the education is expected to produce higher incomes until retirement. If that is the case, perhaps the conversion should be done either now or during the education period, whenever her income is at a low level. This also assumes that she has the funds to pay the taxes from current non retirement sources. Use of low interest rate education loans may also be a consideration to free up funds for conversion taxes or education costs.
Permalink Submitted by Saleah Harpole on Tue, 2009-03-10 23:07
Thank you for your response, that was very helpful!