27 Apr Should I pay college loans with money from an inherited IRA?

Q. My son is graduating from college this year and he has about $50,000 in student loans. I never wanted him to borrow but we didn’t have enough to pay cash. Now I’ve inherited an IRA and I want to use that money to pay his loans. I am still working and saving for retirement also. Should I pay it in one batch or should I just take over his monthly payments?
— Dad

A. It’s a great question.

First, know that the U.S. Department of Education extended the student loan payment pause through Aug. 31, 2022. That means for eligible loans, a suspension of loan payments, a 0% interest rate and no collections on defaulted loans.

Before you make a decision, consider that you will pay federal and state taxes when you withdraw from the inherited IRA, said Bill Connington of Connington Wealth Management in Paramus.

“It would be important to find out how much in taxes you will have to pay which will reduce the amount of dollars you have to pay the debt,” he said. “Liquidating that inherited IRA may push you into the next tax bracket.”

Taxes are also an issue as you decide whether to pay the loans in a lump sum or with monthly payments, he said.

“If you take it as a lump sum, you get to pay all the taxes up front and It could push you into a different tax bracket, whereas making monthly payments would cover your RMD on this account and may not push you into a higher tax bracket.”

But the most important thing is to consider what this inherited IRA means to your retirement.

While getting rid of student debt is admirable, you won’t be able to borrow money to fund your retirement. So make sure you can afford to make these payments for your son before you make any moves.

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This story was originally published on April 27, 2022.

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.