Dear Dr. Don,
I have an IRA account. Can I convert it to a Section 529 plan and use it for my child’s college expenses?
— Marty Matriculate
No conversion opportunities exist. You can either take advantage of the ability to take distributions from the IRA for qualified higher education expenses, and by doing so avoiding the 10 percent early distribution penalty, or cash out the IRA, pay the taxes and put the money to work in a Section 529 college savings plan.
While the IRA account balance doesn’t influence financial aid, there are some financial aid implications in using distributions out of the IRA to fund college expenses. That’s because the distributions will show up as income on the student’s Free Application for Federal Student Aid, or FAFSA. Timing is everything here. When your child is a college senior, there are no more FAFSAs to fill out, and the income from the IRA distribution won’t hurt his or her undergraduate financial aid. The key here is to match the year of the expense with the year of the distribution.
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