Early Withdrawal

Archive for September, 2008

Question: Roth IRA – Save for education?

I read online that you can withdraw from a Roth IRA penalty free if the withdrawals are for education expenses for yourself or a valid dependent.
My question is: Why wouldnt I use a Roth IRA to save for my daughter’s education? This way, if she ends up not needing the money, it’s socked away for my retirement?
Am I missing something here? Is there any Roth IRA “fine print” that I’m not aware of?

Answer: It’s true that you can use your Roth IRA to fund your daughter’s college education.

Your original contributions can be withdrawn tax-free and penalty-free at any time for any purpose since you used after-tax dollars to fund your account. So those are always available for your daughter’s education.

It’s the investment gains (earnings) on your account which are subject to income taxes and a 10% Early Withdrawal Penalty if distributed early. However, a higher education exemption helps you avoid the 10% penalty if you take out investment gains to pay for “qualified higher education expenses” at an “eligible educational institution” for yourself, your spouse, children, or grandchildren.

Keep in mind that any investment gains are still subject to income taxes.

However, it’s still a viable option to use your Roth as a college savings plan. It does give you the flexibility to keep those funds for retirement if your daughter never needs them. The obvious drawback here is that if she does need them, that’s less money in your account for retirement. So if you choose this option, make sure you have an alternative retirement savings plan.

This article tackles the advantages and disadvantages of using your Roth IRA as a college savings plan:

http://www.your-roth-ira.com/roth-ira-for-college-savings.html

And this article notes the benefits of a Roth IRA relative to a Coverdell ESA and/or state 529 plan:

http://www.fairmark.com/rothira/college.htm

Best wishes as you save for the future, and I hope this helps!

Question: How can I avoid the IRA Early Withdrawal fee?

I’m much less that 59 years old but am facing financial difficulty. I’m struggling to make my mortgage payment and am eat up with credit card debt (which I’ve now cut up). I’ve decided that I must access my IRA to make these payments in order to avoid further damage to my credit score.

Is there an IRS rule that will help me avoid the 10% penalty for hardship withdrawals?

Would you agree that even if I must occur the penalty, that is better than ruining my credit and paying credt card late fees?

Answer: Someone asked Suze Ormann the very same question & she went ballistic & then I saw Michael Clark on Sat on CNN & someone called in the same question & he couldn’t answer quick enough. Basically, they had the same answer — they asked how much mtg was owed & at what rate & how long it was for, etc (all the informaion they needed to give a wise answer).

1st – you should not – NEVER -withdraw at any cost any money from your IRA. Not only is there a 10% penalty to pay (can’t get arund it) but the income taxes on the money withdrawn will be taxed at 20 to 30 % — that’s not worth it for sure.

2nd – they both said to go back to your bank and renegotiate your mortgage. Obama’s recovery plan has made it very easy for banks to work with their customers and this is the very first thing they suggest to do. You should be able to get a lower rate & reduce your monthly payments. Some banks even provide for a grace period for people up to 6 months late (I believe).

3. They suggest you get a part time job for extra income besides cutting back on spending, etc –all the things you should know by now.

4. They said not to pay for any credit counseling because you can get it for free & they can negotiate deals with the credit card companies for you whereby you can make smaller payments without penalties.

5. Anything you can sell like a car? bike? or electronic stuff?

6. Would it be possible for you to rent out a room to a college student, or someone just starting out or a relative who is also having problems?

Try to go on the Michael Clark website fon CNN to see what advice he’s given to others in the same predictament. Also, if you could renegotiate your mortgage with the bank & say your current mtg is $150K — a credit counseler may suggest you borrow $175K (new mtg and terms) keep some for savings, emergency money & some to help you pay off y our bills.

The government is also providing free job training if needed to enter a new line of work. There are many agencies out there to help families in need. You need to do some research & forget about your IRA, Even if you suspend contributions for a while, just leave it alone until life turns around for you.

I wish you luck and will say a prayer for your recovery. I’m sorry for you & all those caught up in this horrible Depression we’re in. It’s not fair but if it helps, you have a lot of company now.

Part 10: Distribution options for Roth IRA’s vs Traditional IRA’s

Question: How do I take my distribution out of IRA account with out paying penalty?

I am a sole-proprietor of a small business corporation (applied for S-corporation election for 2006). I have made a contribution to business retirement account for 2006. After making the contribution, I realized that S-corporations can not make contributions to SEP-IRA.

Now I have to take the distribution out of my IRA. Is there any way to do this with out getting fined by IRS for Early Withdrawal.

-thanks

Answer: If it shouldn’t be there to begin with, you will only get penalized if you don’t take it out.

9-15% on your money? and…2 Questions everyone MUST ask their Financial Planner