IRA Distribution to Pay Student Loans

At 59-1/2, there's no penalty, to be clear, there's tax on IRA withdrawals as the money, I assume, went in pretax.

It's taxed at your marginal rate.

will show the rates for 2013. Keep in mind, these are the rates on your taxable income, from the $110K, we don't know how much is taxable, nor did you mention if you are married. If you are determined to do this, I suggest taking out enough to top off the 25% bracket but not going higher. At the very least, I'd break the withdrawals into two years.

The fact that you don't have money available to pay the taxes (in 2014 for the 2013 withdrawal) makes it worse. To net $100, means taking out $133, so you have the $33 to pay in tax. (assuming 25% bracket)

If you take a distribution from your IRA in February 2013, at least some part of the income tax due on that income will need to be paid as a Quarterly Payment of Estimated Tax in April 2013 itself (Note: 2013, not 2014) or else you will need to pay penalties for non-timely payment of tax. One way of avoiding some of this is to ask the IRA custodian to _withhold_ part of the distribution as income tax and send the money to the IRS directly. Most custodians will, in fact, offer to withhold 20% of the distribution for you as a default, and you will need to check boxes and fill in different percentages on the form requesting distribution to have no tax (or more tax) withheld. Taking all the money and putting away a portion to pay the tax due in April 2014 will likely mean that you will pay more in penalties and interest than you will earn in that interest-bearing account.

Dilip Sarwate

you will likely

If the loans are in your daughter's name you will be making a gift to her by paying off her loans. You will have to file a gift tax return. Unless you have been very generous over the years you will likely owe no gift tax.

Bill between your's and Dilip's responses, I will end up paying almost as much in taxes as the amount of money that I need to pull out. A gift tax on top of quarterly taxes that need to be paid in the same year. Wow, I wasn't ready for this.

Bill I found this on Turbotax's website. "The gift tax is perhaps the most misunderstood of all taxes. When it comes into play, this tax is owed by the giver of the gift, not the recipient. You probably have never paid it and probably will never have to. The law completely ignores gifts of up to $13,000 per person, per year, that you give to any number of individuals. (You and your spouse together can give up to $26,000 per person, per year to any number of individuals.)"

By the way I am married.

First, it's up to $14K this year, so $28K from you and the Wife. Next, you still don't pay gift tax. You file a Form 708 and apply the gift against your $5.25M limit.

This year, I can die and leave up to $5.25M to any non-spouse. But, I can also gift up to this amount now and leave my estate with no exemption. A bit convoluted, but the allowed amount for one's estate tax can be used while they are alive.

This wasn't my concern, it's the tax that bothers me.

Because of the new lifetime exclusion amount of $5 million, it is unlikely that you will have to pay a gift tax. And unless your total assets are in excess of $5 million when you die ($10 million if you are married and use a marital trust), it won't come back to bite you in your estate tax, either.

But I have a thought on the income tax side. Do you have a business that you run? Can you hire your daughter, or give her business equipment and lease it back from her? If so, you could give her money to pay her student loans with, and have the money taxed at her marginal tax rate instead of yours.

Talk to your own tax professional if you think this is something that might be a possibility.

___ Stu

On the other hand, if he was a co-signer on the loans and they weren't in the daughter's name alone (a likely scenario), then I don't think paying off the loans would be considered a gift. But maybe borrowing the money in the first place was a gift, unless the daughter was a dependent at the time? It's not common to file a gift tax return for paying tuition and room/board expenses for one's kids.

Tuition paid directly to the educational institution on anyone else's behalf is not a taxable gift in any case.

This looks a tax avoidance scheme with no economic substance -- thus tax evasion, as we learned in another post. Besides, giving her equipment would itself trigger the gift tax.

True, but does that exemption also apply to loan companies? In this case the money is being paid directly to the company/bank/government-agency that gave the loan. So still no gift tax due?

I am leaning towards figuring out what I need to pull out of my IRA to satisfy the loans that are due and also have my IRA company withold the taxes that are due on the money that I pull out. I have not made this calculation yet, as I am going to reach out to a CPA for advice on how to calculate the taxes. It appears that when I pull the money out it will put me in the 33% tax group for 2014, ouch. I just hope my daughter comes to my funeral and has nice things to say about me :-)

The loan company is not an educational institution. Therefore, paying off the loan on behalf of someone else is making a gift to that someone.