25 Jul Can I take from my IRA to pay off my daughter’s college loans?
Q. Can I take from my IRA to pay off my daughter’s college loans?
A. The simple answer is yes, but whether you should is the bigger issue.
There are several factors before making this decision.
First, consider the tax treatment of IRA distributions.
“Distributions from IRAs are treated as earned income in the year that they are taken,” said Ken Van Leeuwen, a certified financial planner with Van Leeuwen & Company in Princeton. “This means you will have to pay income taxes on the amount that is withdrawn.”
If you proceed, it’s important to consider the amount of money you plan to withdraw, Van Leeuwen said. The amount you take will be added to your taxable income for the year and could potentially bump you up to a higher tax bracket.
The next thing to consider is your age.
If you are under 59 ½, you will incur a 10 percent penalty on any withdrawals from the IRA.
“There are some exceptions to this rule, however, repaying student loans is not one of them,” he said.
So you could owe both taxes and penalties.
That means you should consider other buckets of money to pay off the loans, he said.
Van Leeuwen said if you don’t have cash available in other after-tax accounts, you may want to consider a 401(k) loan.
“If you are enrolled in a retirement plan through your employer, it is possible that you will be able to get a loan on the value of your account,” he said. “This amount is usually limited to the lesser of 50 percent of your account value, or $50,000, so depending on the loan balance and the amount of assets in your 401(k), this may work.”
Van Leeuwen said when utilizing this strategy, it is important to understand that you are borrowing the funds from yourself, so all future payments of principal and interest are deposited back into your 401(k).
But make sure you remember that if you leave or lose your job, you’ll have to pay back a 401(k) loan relatively quickly, it could be treated as an early distribution and you could face taxes and penalties.
And with taking from any retirement account for another purpose, you’re putting your future retirement at risk.
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This story was originally published on July 25, 2019.
NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.