Is This a Good Idea or Not? | Tax Tip of the Week | No. 165 September 26, 2012
Posted by bradstreetblogger in : Tax Tip, Taxes, Taxes, Uncategorized , add a commentUsing IRAs to Cover College Expenses
College students have now headed back to school. But how are you going to pay for the next year of college? Some people will be able to write the check. But the majority of the population relies on loans, grants, scholarships, funds from family members and student earnings to cobble together enough money to pay the bills. What if it isn’t enough? Can you use your retirement savings to help pay the bill?
First of all, consider whether you should use your retirement assets. Are you putting your retirement at jeopardy to give your student a chance to have a good life? Many advisors will tell you that you can borrow to pay for college, but you cannot borrow to pay your expenses in retirement. The message is to look for all possible sources of cash before you consider using your retirement funds.
If you are over the age of 59 1/2, you have access to your retirement funds without penalty. You will have to pay income tax on any distributions you take, but the retirement funds are now available for you to use as you wish.
A problem exists if you are under age 59 1/2 and are subject to the 10% early distribution penalty. Fortunately, payment of higher education expenses is an exception to this penalty and the tax code is generous about applying this exception. The IRA owner can pay for expenses for himself, his spouse, or the children or grandchildren of either the account owner or the spouse. You can apply the exception to the unreimbursed payment of tuition, books, fees, supplies and required equipment – in other words, the expenses minus any financial aid. Room and board are qualified expenses if the student is enrolled on at least a half-time basis. The expenses must be paid in the same year that a distribution is taken from the IRA.
Good luck to all those students who returned to college this fall. And good luck to those that are footing the bill. Use your retirement assets only as a last resort and don’t pay the early distribution penalty if you qualify for this exception!As always, give us a call if you have any questions.
You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.
Rick Prewitt – the guy behind TTW
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…until next week.
Rollovers as Business Startups | Tax Tip of the Week | No. 109 September 7, 2011
Posted by bradstreetblogger in : Tax Tip, Taxes, Taxes, Uncategorized , add a commentROBS – A Good Idea?
The tax code is full of acronyms. This week we’ll take a look at “Rollovers as Business Start-ups”—ROBS.
There are an increasing number of promoters that advocate using this method to help taxpayers establish a new business. ROBS is an arrangement in which prospective business owners use their retirement funds to pay for new business start-up costs. Typically it works like this: You pay a fee to a plan sponsor to create a corporation, which sets up a profit sharing plan. Then you roll your retirement assets into the corporate plan and the-now funded plan buys the stock of your new company. As a result, your new company’s retirement plan owns your company’s stock, and your company has tax-free cash.
The IRS admits that ROBS are not considered an abusive tax avoidance transaction. While profit sharing plans are a legitimate way to reward employees, they must follow strict rules. These include filing annual tax returns and Form 5500 returns. These plans must also avoid transactions that discriminate in favor of highly paid employees, including yourself.
While the idea of receiving tax-free cash to start a new venture is attractive, there is the potential of many pitfalls. Once again, the old adage of “if it sounds too good to be true, it probably is” applies here.
Give us a call if you want to look at this, and other methods, to start your new business.
You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.
Rick Prewitt – the guy behind TTW
…until next week.
