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Roth IRA part 2, the Conditional Withdraw,

Example for Education


It’s Never Too Early to Get Your Kid Saving for Retirement. Here’s How.

I came across this headline from Barrons .02.17.19

"Indeed, setting up a Roth IRA for your children—or your grandchildren —might be the single best thing you can do to help jump-start a kid’s long-term wealth and, along the way, teach invaluable lessons about saving and investing." 

Yes but what if they or you need the money first for education?  I believe that is a life event that will precede   a child's need for retirement money.  Saving early for retirement is a slogan not a reality.  How many times have you heard it?  How many people do you know that do it?  The gap must be enormous.  There is a statistic that indicates over 70% of people that start a retirement fund, keep those funds till retirement.  Why?  Life happens first.

 

So if you have a Roth IRA or your child has a Roth IRA this is what happens if you need to withdraw from the sequestered Roth account for education expense.  Remember if you screw up the income portion will become taxable and subject to a 10% penalty.  Your contribution still remains "taxfree" because you already paid taxes on it.

 

I am writing this because the Lesson in Liberty is a 200 year old contractual investment with insurance companies, that keeps you income tax free, your contribution tax free, your income compounds tax free, and you estate is tax free. And you can use it for any educational institution, for example Private High School, not just Universities.   You can contribute any amount of funds not just $6,000 per year, you want from any source of funds, not just salary.   Example, you sell a car, you can put the funds in this account.  I am talking about a concept of savings and using cash flows called the Infinite Banking Concept.  Granted it requires time and education and at times complicated.  But not as complicated and involved and conditional of the following IRS regulations.

 

If you stop here and can’t get through the following material, without your head spinning, I don't blame you.  If you want to know more about IBC, just send me your email. or Buy one of the books on this site.


Education expenses paid with any of the following funds.  The IRS even limits where the funds come from  to pay for education. 

 

Roth IRAs and traditional IRAs follow different guidelines.

A traditional IRA is funded by pre-tax dollars, while a Roth IRA is funded by post-tax dollars. Both traditional and Roth IRAs allow you to withdraw money for qualified higher education expenses before 59.9 without incurring the 10 percent early withdrawal penalty.

 

Qualified expenses are amounts paid for tuition, fees and other related expense for an eligible student that are required for enrollment or attendance at an eligible educational institution. ... For example, the cost of a required course book bought from an off-campus bookstore is a qualified education expense.

Even if you are under age 59½, if you paid expenses for higher education during the year, part (or all) of any distribution may not be subject to the 10% additional tax. The part not subject to the tax generally is the amount that isn't more than the qualified higher education expenses (defined next) for the year for education furnished at an eligible educational institution (defined below). The education must be for you, your spouse, or the children or grandchildren of you or your spouse.

When determining the amount of the distribution that isn't subject to the 10% additional tax, include qualified higher education expenses paid with any of the following funds.

  • Payment for services, such as wages.
  • A loan.
  • A gift.
  • An inheritance given to either the student or the individual making the withdrawal.
  • A withdrawal from personal savings (including savings from a qualified tuition program).

Don't include expenses paid with any of the following funds.

  • Tax-free distributions from a Coverdell education savings account.
  • Tax-free part of scholarships and fellowships.
  • Pell grants.
  • Employer-provided educational assistance.
  • Veterans' educational assistance.
  • Any other tax-free payment (other than a gift or inheritance) received as educational assistance.

Here is the definition of Qualified Educational Expenses

Qualified Education Expenses

Qualified expenses are amounts paid for tuition, fees and other related expense for an eligible student that are required for enrollment or attendance at an eligible educational institution. You must pay the expenses for an academic period* that starts during the tax year or the first three months of the next tax year.

 

Eligible expenses also include student activity fees you are required to pay to enroll or attend the school. For example, an activity fee that all students are required to pay to fund all on-campus student organizations and activities.

 

For AOTC only, expenses for books, supplies and equipment the student needs for a course of study are included in qualified education expenses even if it is not paid to the school. For example, the cost of a required course book bought from an off-campus bookstore is a qualified education expense.

 

 

Expenses that Do Not Qualify

Even if you pay the following expenses to enroll or attend the school, the following are not qualified education expenses:

  • Room and board
  • Insurance
  • Medical expenses (including student health fees)
  • Transportation
  • Similar personal, living or family expenses

 

Sports, games, hobbies or non-credit course

Expenses for sports, games, hobbies or non-credit courses do not qualify for the education credits or tuition and fees deduction, except when the course or activity is part of the student’s degree program. For the Lifetime Learning Credit only, these expenses qualify if the course helps the student acquire or improve job skill


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