Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: My 45 year old customer wants to use the money in his traditional IRA to pay for his child’s college expenses.  What are the tax consequences of taking a withdrawal for that purpose?

Answer: The distribution would be subject to normal income taxes to the extent it is taxable.  For most traditional IRAs, all the distribution would be taxable.

For IRAs, a 10% penalty tax potentially applies to taxable distributions taken prior to age 59 ½.  However, an exception to the penalty tax exists for distributions taken to pay for higher education expenses of the taxpayer or the taxpayer’s spouse, kids or grandkids.

Note that the 10% penalty tax exception is NOT available for distributions from a pension plan, such as a 401(K) plan.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.