Traditional IRAs for College Planning

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Traditional IRAs for College Planning

Along with creating the education IRA, the Taxpayer Relief Act of 1997 allowed investors to draw on traditional IRAs for education expenses without incurring early withdrawal penalties. Acceptable uses for traditional IRA proceeds include tuition, supplies, and—for students enrolled at least part-time—room and board.

Here are some answers to some common questions about using traditional IRAs for college planning:

• How much can I contribute to the plan? Check the IRS’s Website for current contribution limits.
• What are the plan’s investment options? You can invest an IRA in almost anything.
• What are the taxes? Withdrawals will be taxed at your regular income tax rate. Some or all of your contribution may be tax-deductible, depending on your income and some other factors.
• Who controls the money? It’s your account. You decide how the money is spent, if at all. If your child doesn’t go to college, you can hold on to the IRA for your own retirement.
• Can the money in the plan be used for anything other than education? If you withdraw the money and don’t use it for eligible college costs, you’ll be hit with a penalty.

This may be a good fallback way to save for college. It isn’t the ideal way, though, given your other options. If you qualify for the tax break that a traditional IRA affords, you should probably be using this vehicle as a means for funding your own retirement instead of your child’s education.