NEW POLL: Sunset of 529 tax exclusion

user_660 2005-09-19 13:28:00 UTC #21

TJ: Makes perfect sense. I agree with that scenario. Though, I was looking at it from a perspective that one is taking out "large" earnings where the standard deduction would not offset this. (ie $20,000+ withdrawal and half is earnings) Ofcourse that was my assumption and there are many assumptions to be made.

Let me summarize by saying, I fully agree with your strategy of the use of a Child's Roth IRA. Thanks!!!!!!!

user_4533 2005-09-19 14:47:00 UTC #22

TJ, Mark A;

Regarding the kids Roth IRA, is there a restriction that the funds have to be deposited for five years before the earnings can be withdrawn penalty free?

I'm just wondering what the realistic window for using the kids Roth IRA would be? There is no minimum age right, but they have to have taxable income?

Finally, if the kid only earns 1k a year, can parents/grandparents still contribute up to the annual Roth IRA limit?

user_660 2005-09-19 14:51:00 UTC #23

pjw: 5 years AND age 59 1/2 for tax free withdrawals....not penalty free!

Yes, the kid has to have legit earned income...thats the key...so lawn mowing service, baby sitting, newspaper delivery route, modeling, etc. can qualify.

Contributions are based on earned income... the LESSER of $4,000 or total earned income. If child only earns $3,000, thats the most that can be contributed that year.

Hope this helps.

[This message has been edited by Mark A (edited September 19, 2005).]

user_4533 2005-09-19 16:03:00 UTC #24

Mark,

Yes, I meant the 10% additional tax, not penalty.

What I was trying to determine was whether or not the 5 year restriction applied to withdrawals used for qualified higher education. Since posting the original question I checked IRS pub 590 and it lists "qualified education expenses" as one of the exceptions to the 10% additional tax. So I think this means there is no 5 year restriction if the withdrawal amount does not exceed the qualified education expenses right? Opinions?
http://www.irs.gov/publications/p590/ch02.html#d0e9969

sonny98 2005-09-19 18:19:00 UTC #25

Re Roth IRAs

It seems to me withdrawals from Roth IRAs will effect the following years aid calculations.

I believe Roth withdrawals are reported on 1040 Line 15-A but of course nothing is taxable for income tax purposes therfore line 15-b is zero.

However for aid purposes the difference between line 15a & b is reported on worksheet B and included as untaxed income.

Which puts the distribution from the Roth IRA into FAFSA calculations.

Is that how you see it?

user_660 2005-09-20 09:18:00 UTC #26

pjw: To hopefully clarify, there is a 10% penalty for early withdrawal of earnings from a Roth IRA unless held for 5 yrs and age 59 1/2 (certain exceptions apply)...this 10% penalty results in an additional 10% tax on top of regular income taxes owed due to the withdrawal.

THE PENALTY & TAX IS THE SAME!

But there is income tax due if earnings are withdrawn prior to age 59 1/2 and opened for 5 yrs...regardless of use of the earnings.

[This message has been edited by Mark A (edited September 20, 2005).]

user_660 2005-09-20 10:22:00 UTC #27

Sonny98: "Re Roth IRAs
It seems to me withdrawals from Roth IRAs will effect the following years aid calculations.

I believe Roth withdrawals are reported on 1040 Line 15-A but of course nothing is taxable for income tax purposes therfore line 15-b is zero.

However for aid purposes the difference between line 15a & b is reported on worksheet B and included as untaxed income.

Which puts the distribution from the Roth IRA into FAFSA calculations.

Is that how you see it?"

Yes, I agree with that.

tjkohler 2005-09-20 11:53:00 UTC #28

"Which puts the distribution from the Roth IRA into FAFSA calculations."
Only when you distribute earnings and not principle.

The 10% penalty/tax would not come into play since you can take the money out penalty free for education and first home purchase (up to $10K).

user_660 2005-09-20 12:44:00 UTC #29

TJ: I believe that the "untaxed portion" of Roth IRA distributions INCLUDES the nonearnings portion as well!...and therefore is included on the FAFSA.

sonny98 2005-09-20 17:24:00 UTC #30

I am pretty sure Mark and I are right. Can't see how you get out of including it in the following year calculations.

Un-taxed income does not just mean tax-free stuff like muni-bonds.

If you follow the worksheets to the FAFSA you see they pick-up everything.

Aren't you expecting another tax deduction or did your wife already have it?

Just more pressure on the retirement to put another kid through college.

user_2529 2005-09-20 20:55:00 UTC #31

Does either FAFSA worksheet B or 1040 Line 15 ask for IRA "withdrawals" OR "untaxed income" from IRAs? IRA withdrawals may include any dollar removed from a Roth, but I would interpret untaxed "income" as any gain taken from the Roth and not count a withdrawal of principal as "income".

drew 2005-09-21 08:44:00 UTC #32

Hey folks, we are all , me too, way off the original question as posted as to sunset provisions.

user_660 2005-09-21 09:29:00 UTC #33

Mike: Worksheet B asks for "Untaxed DISTRIBUTIONS"

The FAFSA on worksheet B asks for untaxed IRA distributions that go on the 1040 (its been line 15 in previous years.)

On the 1040, you include the TOTAL distribution, then to the right, you include any taxable portion. This separates whats taxable and whats not as far as the IRS is concerned.

As far as the FAFSA is concerned, again,it asks for untaxed IRA distributions. They will "pick up" the taxable portion as well.

Remember, as far as financial aid goes, if you get access to "cash" that WILL effect financial aid eligibility. Contributions from Roth IRAs that are withdrawn can certainly be used for paying for college...at least in the DOE's view.

PS: This surely wouldn't be the first "hijacked post!

[This message has been edited by Mark A (edited September 21, 2005).]