I was tempted to start a 529 plan for my kids, but I just learned recently that I can withdraw money from my IRA to fund college tuition without the 10% penalty. What are the major pros and cons of doing this? It seems like you have more flexibility with the IRA than a 529.
One 'con' that comes to mind: The IRA withdrawal may be penalty free but not tax free. Current law (read that "I don't know, nor does anyone here, what the tax laws will be in 10 years, or two for that matter) has
529 withdrawals for college, tax free. So the growth escapes all tax, but the IRA is taxed as ordinary income, whatever your marginal rate is. (If you say that you have enough in other accounts for retirement, then you are likely in a high bracket, 28% or higher, and that's quite a hit on the 'college IRA')Also, you might want to actually use the IRA for retirement. There's a school of thought that says one should plan for their own retirement first, and their child's education after. Sparing the kids the burden of taking care of you might be more appreciated than the free ride through school.
(me, I got a full scholarship for college, but still brace myself for when the parents on both sides money runs out, go figure) JOE
"joetaxpayer" wrote
Ethics and love trump money? Perhaps you have real wealth as a result. :-)
I agree, thats one disadvantage in that you get taxed as ordinary income. But I thought there was some talk that in a couple of years, the rules change in that a student will be taxed on withdrawals made from a 529, or maybe they changed their minds, I could be wrong.
The "Pension Protection Act" of 2006 made the tax free withdrawal "permanent". It was set to expire in 2010 along with the inheritance tax, but the 529 was included in this act. I am not suggesting they wouldn't change their collective mind again, just stating the law as it is now. JOE
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