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Your IRA and the Rules of Engagement

My wife and I have been discussing retirement options lately. We've had the requisite 2.3 children (A dog, two cats, a hamster, and a "pet rock" make up the .3) and attended all of the PTA meetings and town league baseball games that go with the family thing. Time to settle down and relax or so I thought. That was until my son uttered a four letter word that will change both our lives forever: NJIT.

The last time I checked, tuition at the New Jersey Institute of Technology was $11,961A SEMESTER. I check every fifteen minutes or between panic attacks, whichever comes first, hoping that perhaps the figure became blurred through my uncontrollable sobbing.

So what's a parent to do? My knee-jerk reaction is to get the money from an IRA. No, not the Irish Republican Army, although it may seem easier to try to get it from a few angry men in skirts than from my individual retirement account. We have a sizable IRA, but there are restrictions on accessing it.

Rules On Early Distribution

One must be 59 1/2 to draw on an IRA account without penalty. However, should we need to draw on the account before this time, the IRS can assess a 10% penalty on the taxable portion of this early distribution. Typically, this means that the penalty is on 100% of the early distribution. This money will be taxed as income according to your tax bracket. My head hurts already.

Along with my tax returns, I'll need to complete a 1099-R statement and provide all the supporting documentation. While I've always used a free tax prep software, it appears that is about to change. As I consider adding the tax accountant's fees to my list of new, annual expenses, one thing becomes apparent.

There will be more uncontrollable sobbing.

The Good News

College tuition is an acceptable reason for early distribution. Rules state that the money can be used to pay college expenses for you, your spouse, a child or grandchild. Tuition, fees, and room and board are all considered legitimate expenses.

Here's a short list of other acceptable reasons for early withdrawal:

  • Permanent Disability

  • Payment of medical expenses which exceed 7.5% of your adjusted gross income

  • Purchase of a first home ($10,000 lifetime limit)

  • Payment for medical insurance during an extensive period of unemployment

  • Payment of IRS levies

We're not alone in our predicament. Currently, there is much debate revolving around the value of a college education. The average graduate of a four year institution of higher learning leaves with a degree in hand, big dreams and according to a New York Times article of Dec 2009, $23,200 in debt.

Shortly we'll sit down and total the financial aid, partial scholarship, student loans, and IRA money. It appears we should have just enough to make this happen and it won't seem long before we're attending his class' commencement ceremony. "Pomp and Circumstance" always brings a tear to my eye.

Richard Rossi is a guest blogger, published humor writer and childrens book illustrator from Greensboro, North Carolina. You'll find examples of his work at his website, www.rossibook.com

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