One of the benefits of an Individual Retirement Account (IRA) is that it allows you to withdraw funds for qualified higher education expenses without facing tax penalties. As long as the funds are for qualified education expenses, are paid to an eligible educational institution, and a member of your family incurred the expenses, you can enjoy tax-free growth of your money until the time of withdrawal. If you're considering different options for funding education, learn use an IRA as a college savings plan.
Instructions
1. Decide which type of IRA you want to use. A Traditional IRA will allow you to withdraw funds for college expenses while avoiding the 10 percent penalty for early withdrawal. You would still have to pay any income tax on the distribution itself. With a Roth IRA, if distributions are limited only to what you have contributed, then there is no tax penalty for withdrawals. You will also need to make sure that you meet the income requirements for contributing to an IRA.
2. Open an account. You may choose to open an IRA through your bank or through one of the many online companies that offer them, such as Vanguard, T. Rowe Price and Fidelity. If you're planning to open your IRA online, take time to research the different investment options of each company before making your choice. You should base the type of investment on how long you have until the funds will need to be available.
3. Begin funding your account. The current maximum contribution limit for a Traditional or Roth IRA is $5,000 per year, and these amounts are subject to increase by the IRS. You can fund your account in full upon opening or choose to make monthly or quarterly deposits. While you are not required to contribute the full amount, it's best to maximize contributions to take advantage of accruing interest. If you're planning to use an IRA for a college savings plan, you should open the account as far in advance of the withdrawal date as possible to allow for maximum growth.
4. Decide when you will need to make withdrawals and in what amount. Calculate the total amount of funds you or your student has accumulated or will accumulate in the form of scholarships, student loans, grants and funds from other savings vehicles. Compare this amount with the amount needed for qualified educational expenses, including tuition, books and room and board. This will determine the shortfall amount that you will need to withdraw from your IRA.
5. Contact the financial institution that holds your IRA and complete the appropriate paperwork when it is time to make your withdrawal. You may need to provide a list of the expenses that you are making the withdrawal for and verify that the educational institution is eligible.
Tags: will need, college savings, college savings plan, education expenses, educational institution, funds qualified