Savings accounts vs. IRA – how to pay for college
Paying for higher education is never easy for an average teenager. High school is fine due to the various government programs which ensure quality education for all. But getting into college can be quite a task if you do not have a rich dad or stellar SAT scores. But there is no need to lose hope; an IRA account can provide you a tax free haven to save for educational expenses unlike a savings bank account.
If you use the distribution that you get from either a traditional IRA or even a rollover IRA to pay for education for your family, you will be exempted from the ten percent early withdrawal penalty that is imposed by the IRS.
This is much better than going for a personal loan where you will end up paying interest for years after your education. The way to do this is to claim the distribution amount as income on the federal income tax. To calculate the savings, enter the total amount from the IRA distribution as the principle amount and add the present interest rates for a number of years you might need to pay back the amount. If you compare this to the amount you will save in taxes, you will find the savings are enormous.
You need to remember though that the amount you use from the IRA is exempt only for that part of which you use to pay for education. But any assistance, scholarships or grants will be deducted.
If you use around $200000 from the IRA for educational expenses, but receive grants and scholarships that total to $2000, then you will be charged the ten percent early withdrawal tax on $2000 of the IRA distribution.
If you have switched a number of companies over the years, you will have a couple of 401k or pension plans in your name. In order to use this for education, you just need to transfer it into a rollover IRA.
Now there is a big difference when you withdraw funds from a savings account to pay for education. Taxes will apply even if you receive a large amount of money as gift due to large scale capital gains. And if you take out a loan in your name, you will end up being laden with years of repayments and fluctuating interest rates. All this leads us to the conclusion that the IRA accounts far outweigh savings accounts in the quantum of benefits provided.
