roth for college
I have a client age 40 who is converting his IRA to a Roth IRA in 2010. His now will be starting college soon – can the father use his Roth contributions to pay for his sons college? If so, is there any witing time to do so? Thank You
Permalink Submitted by Clyde Wolf on Wed, 2009-11-11 18:50
Annual contributions and Conversions can be distributed from a ROTH IRA at any time for any reason tax free and peanalty free. There is no waiting period unless it is imposed by the IRA custodian.
Qualified higher education expenses can be paid without penalty from a Traditional IRA, income taxes would apply. The difficulty here may be taking a larger distribution than is needed to pay the qualified expenses. This excess would be subject to the early distribution penalty.
See IRS Pub 590 Individual Retirement Arrangements, Pages 54 – 55 for more details:
http://www.irs.gov/pub/irs-pdf/p590.pdf
Permalink Submitted by Alan Spross on Wed, 2009-11-11 19:06
To clarify, qualified higher education expenses are an early withdrawal penalty exception for EITHER a traditional or Roth IRA. Therefore, if the 2010 conversion is father’s first Roth IRA contribution, he can withdraw qualified HE expenses from the Roth and NOT be subject to the 5 year conversion holding period to avoid penalty. However, these distributions from the Roth will accelerate the tax bill for the conversion that would have been deferred to 2011 and 2012 into the year of distribution, perhaps 2010. He would then have to report conversion income in 2010 that would have been reported in 2012, thus accelerating the tax bill. He also has the choice of simply opting out of the two year deferral altogether if it benefits him or makes things simpler.
To use the HE exception, the distribution must be properly timed with the expense payments due. As you can see, these issues are going to take some careful planning to get the best tax benefit.