retirement

Raiding retirement to pay for grad school

Don TaylorDear Retirement Adviser,
Can I use my rollover individual retirement account to help pay my mortgage and other bills while I'm attending graduate school? I'm planning to take student loans to pay for school. But I don't want to pay my other bills using borrowed money. What advice can you offer me on how to manage my finances while going to grad school?

Thanks,
-- Noelia Novice

Dear Noelia,
The answer is yes, you can raid your rollover IRA to pay your qualified higher education expenses. And you can avoid paying the 10 percent penalty tax on early distributions out of the account. According to IRS Publication 590, Individual Retirement Arrangements, "... if the individual is at least a half-time student, room and board are qualified higher education expenses."

Such withdrawals will reduce how much financial aid you can qualify for. But they should not reduce the size of direct federal student loans you can obtain for school.

As a homeowner with a mortgage, identifying your specific qualified education expenses will be challenging. You might want to meet with a tax professional.

It might be better if you pay for your tuition, fees and books using distributions out of the IRA and use the student loans for living expenses. A discussion with your school's financial aid office would help there.

One thing worries me: Raiding your retirement account to pay bills while in graduate school will force you to pay income taxes on early distributions. Although you should be in at a lower tax bracket while you're in graduate school, taxes are just an additional drain on the account balance.

A student loan might be a better option in financing everything, including your living expenses, compared with raiding your retirement account. The point could be moot if you can't borrow enough in student loans to finance both your tuition and living expenses. It is common for college students to finance both tuition and room and board. So why don't you?

Investing in your retirement and your education are competing goals for you in this instance. What about keeping them both in mind? You're considering sacrificing one for the other, perhaps with the idea that future earnings will allow you to have both a higher current standard of living and a higher retirement income. My thought is that raiding your retirement account carries a higher price than you might think. So, think about keeping more of the money invested for retirement while taking student loans for tuition and room and board.

The amount of money involved is substantial enough that it makes sense to pay a financial planning professional to help you decide.

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