How to Pay for Education Loans with IRA Money

Paying off your student loans isn't an exception to the IRA early-withdrawal penalty.

Paying off your student loans isn't an exception to the IRA early-withdrawal penalty.

Though they're designed for retirement savings, there's no law that prevents you from taking your money out whenever you want it, including to pay off student loans. However, getting your money out isn't cheap: When you take a non-qualified withdrawal, you'll pay an extra 10-percent tax penalty. If you're withdrawing from a traditional IRA, that means any withdrawal before age 59 1/2. For Roth IRAs, that means any withdrawal before your account has been open for five years and you are either 59 1/2 or permanently disabled. You won't be able to use the higher-education early withdrawal exception when you're paying off your student loan because the loan isn't a qualified education expense. However, Roth IRAs do have a silver lining of allowing you to withdraw your contributions tax-free and penalty-free any time.

Request a distribution from your IRA with an IRA withdrawal form from your bank. You'll need to provide your name, identifying information, account information and the amount you need to withdraw. You don't have to tell your bank why you're using the money, however.

Use the money to pay your student loans. This is not a qualified exception to the early withdrawal penalty, however, so you won't get out of the 10-percent early withdrawal penalty.

Report the IRA on your taxes with Form 1040 and, if any of your early withdrawal is taxable, Form 5329 to calculate your early withdrawal penalty. If you are only taking out contributions from your Roth IRA, simply report the amount of the contributions as a nontaxable IRA withdrawal. If you're withdrawing any earnings from your Roth IRA, or any amount from your traditional IRA, you'll owe taxes plus the 10-percent early withdrawal penalty.


About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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