Search Knowledge Base by Keyword
Taxpayers Guide to LLCs and S Corps
Expat and Expatriate KB
Rental Property KB
Other Tax Information KB
Small Business KB
- Articles coming soon
IRAs and Savings Bonds To Help With Higher Education Costs
It’s a little known secret that some investment options offer tax savings for higher education costs. These would include traditional IRAs, Roth IRAs, as well as savings bonds. Read on to get in on the secret.
Traditional IRAs and Roth IRAs
IRA accounts offer great investment options for those saving towards retirement. Although there are strict rules for withdrawals made before age 59 1/2, money taken out to pay for college education is potentially tax free.
The 10% penalty that is normally applied to early withdrawals, is waived when used for qualified education expenses. Keep in mind that if the costs are less than the amount withdrawn, income taxes and the 10% penalty will apply to the excess amount.
For example, you withdraw $10,000 to pay for $7,000 in education and tuition expenses, you will pay a 10% penalty or $300 in this example. Bummer thing is that not all expenses associated with education qualifies. But the big one, room and board, actually does qualify to offset the 10% penalty.
On the upside, withdrawals can be used for you, your spouse, your children, and your grandchildren.
Qualified education expenses include amounts paid for books, supplies, equipment, and include room and board for students enrolled at least half-time. Post-secondary education schools who participate in the federal financial aid program are qualified education institutions.
Savings bonds have favorable tax treatment when they are redeemed for higher education costs. The trick to this benefit is that they must be redeemed in the same year you have qualified education expenses. However, this is limited to the redemption of Series EE bonds issued after 1989 and Series I bonds only.
Further tax savings may be achieved by rolling over Series EE bonds and Series I bonds. If you roll over the bonds into a section 529 plan or Coverdell Education Savings Account, the interest is tax free.
Of course all this good news could be squashed if your income is above $87,850 (single) or $109,250 (married filing jointly). Those levels of income disqualify you for this special tax treatment.
Qualified education expenses include amounts paid for books, supplies, equipment, and include room and board. Post-secondary education schools who participate in the federal financial aid program are qualified education institutions.