Better to pay for education from a ROTH or a TRADITIONAL IRA?
Client has two IRA’s and wants to go back to school. He has both. Which IRA is consider better to withdrawl funds from. Consider IRAs to be equal in every way.
Client has two IRA’s and wants to go back to school. He has both. Which IRA is consider better to withdrawl funds from. Consider IRAs to be equal in every way.
Permalink Submitted by Alan - IRA critic on Thu, 2014-04-17 23:07
To the extent his expenses meet the higher education penalty exception, there will be no penalty for distributions from iether type of IRA. But TIRA distributions are taxable and Roth IRA distributions not taxable up to the amount of his contributions. Most people have far more in contributions in their Roth than they do earnings. So basically the ordinary income tax on the distribution is the difference. If he has little income that year, it is preferable to use the TIRA because taxable income will be low, possibly even low enough so he has no taxes due. If his income is very low then, he should use the TIRA and save the Roth for distributions when he is in a higher tax bracket. Nothing to stop him from splitting the distribution either, perhaps using the TIRA first until he thinks the distributions are enough to be taxed or perhaps to the top of the 10% bracket, then use the Roth for the rest to keep his tax bill from going higher.