TSP/Roth IRA withdrawals for law school tuition?

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roofles
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TSP/Roth IRA withdrawals for law school tuition?

Postby roofles » Wed Dec 08, 2010 11:24 pm

Kind of a random question, but before attending law school I worked for the federal government and have some money in my TSP (retirement) account. Does anyone know if I can pull any or all of the money out without penalty? The same question goes for whether I can do the same with a Roth IRA. Would this be too short-sighted considering tax deductions from student loan interest? Thanks for any help.

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vanwinkle
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Re: TSP/Roth IRA withdrawals for law school tuition?

Postby vanwinkle » Wed Dec 08, 2010 11:35 pm

Because they were post-tax dollars anyway, you can withdraw the amount you contributed to a Roth IRA back out without any penalty.

With regard to a TSP, I don't know. I know you can withdraw penalty-free from an IRA, but those rules are IRA-specific. You'd have to look up the TSP rules.

Student loan tax interest deductions phase out above a certain income ($80K/yr, I think) and are still less than the amount of interest you'd have to pay, so avoiding the loans entirely is still the better option if you know you're going to be paying them off yourself. However, if IBR is an option for you given your target school/career goals, then you might be better off saving your money for now and letting IBR pay off your loans.

mala2
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Re: TSP/Roth IRA withdrawals for law school tuition?

Postby mala2 » Fri Dec 31, 2010 2:54 am

I already took money out of my TSP when I got out of the army. You can withdraw it.

I also had IRA money which I took out.

Both charged a 10% penalty and withheld I think 20% for taxes. You end up getting taxed based on your actual tax rate so I'll get all that back. The IRA penalty is returnable for higher education costs. The TSP penalty is not. It is only waived in years that you spend more than 7.5% of your income on medical expenses.

mala2
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Re: TSP/Roth IRA withdrawals for law school tuition?

Postby mala2 » Fri Dec 31, 2010 4:14 pm

vanwinkle wrote:Because they were post-tax dollars anyway, you can withdraw the amount you contributed to a Roth IRA back out without any penalty.

With regard to a TSP, I don't know. I know you can withdraw penalty-free from an IRA, but those rules are IRA-specific. You'd have to look up the TSP rules.

Student loan tax interest deductions phase out above a certain income ($80K/yr, I think) and are still less than the amount of interest you'd have to pay, so avoiding the loans entirely is still the better option if you know you're going to be paying them off yourself. However, if IBR is an option for you given your target school/career goals, then you might be better off saving your money for now and letting IBR pay off your loans.


that's only true if you've had the roth for 5 years, otherwise there is a 10% penalty

roofles
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Re: TSP/Roth IRA withdrawals for law school tuition?

Postby roofles » Mon Aug 20, 2012 9:48 pm

Sorry to resurrect an old thread, but for the benefit of anyone in this situation in the future I thought I should post an update. I ended up pulling money from my Roth IRA thinking it would be at worst penalized at 10%. Turns out that is wrong. The IRS came calling more than a year later, saying that everything that I withdrew is taxable income. My accountant tells me that the 10% only applies to actual contributions, rather than interest gained from the contributions. In my case, I got screwed because almost all of the value withdrawn was from gains from the initial contributions to the Roth IRA. I'm not yet a lawyer and I'm surely not an accountant, but I thought that I would pass this on to possibly prevent others from having the same problem.

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Tiago Splitter
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Re: TSP/Roth IRA withdrawals for law school tuition?

Postby Tiago Splitter » Wed Aug 22, 2012 1:10 pm

roofles wrote:Sorry to resurrect an old thread, but for the benefit of anyone in this situation in the future I thought I should post an update. I ended up pulling money from my Roth IRA thinking it would be at worst penalized at 10%. Turns out that is wrong. The IRS came calling more than a year later, saying that everything that I withdrew is taxable income. My accountant tells me that the 10% only applies to actual contributions, rather than interest gained from the contributions. In my case, I got screwed because almost all of the value withdrawn was from gains from the initial contributions to the Roth IRA. I'm not yet a lawyer and I'm surely not an accountant, but I thought that I would pass this on to possibly prevent others from having the same problem.


Sounds like you may need to fire your accountant.

Roth contributions come out first and are always tax and penalty free (meaning ignore mala's comment above. The five year holding period has nothing to do with being able to withdraw contribution dollars tax and penalty free.) Earnings on those contributions come out last and are penalty free if used to pay for higher education expenses. If everything you withdrew from your Roth went (directly or indirectly) towards law school expenses incurred in the same calendar year as the distribution you owe no penalty. Simple as that.

The IRS said that everything was taxable income because they received a 1099 from the brokerage firm or bank holding the Roth indicating only the amount you withdrew. It is up to you to keep track of your basis. On line 15a of the 1040 you indicate the total amount withdrawn from your IRAs. Line 15b then asks you for the taxable amount.

As to the TSP, while distributions directly from the TSP do not qualify for a penalty waiver for higher education, you can roll your TSP to your IRA and withdraw from the IRA to get that waiver. Income taxes still apply, but no penalty. Doing this rollover directly (meaning you don't touch the funds) prevents the 20% automatic withholding as well.

roofles
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Re: TSP/Roth IRA withdrawals for law school tuition?

Postby roofles » Thu Aug 23, 2012 3:37 am

Tiago Splitter wrote:
roofles wrote:Sorry to resurrect an old thread, but for the benefit of anyone in this situation in the future I thought I should post an update. I ended up pulling money from my Roth IRA thinking it would be at worst penalized at 10%. Turns out that is wrong. The IRS came calling more than a year later, saying that everything that I withdrew is taxable income. My accountant tells me that the 10% only applies to actual contributions, rather than interest gained from the contributions. In my case, I got screwed because almost all of the value withdrawn was from gains from the initial contributions to the Roth IRA. I'm not yet a lawyer and I'm surely not an accountant, but I thought that I would pass this on to possibly prevent others from having the same problem.


Sounds like you may need to fire your accountant.

Roth contributions come out first and are always tax and penalty free (meaning ignore mala's comment above. The five year holding period has nothing to do with being able to withdraw contribution dollars tax and penalty free.) Earnings on those contributions come out last and are penalty free if used to pay for higher education expenses. If everything you withdrew from your Roth went (directly or indirectly) towards law school expenses incurred in the same calendar year as the distribution you owe no penalty. Simple as that.

The IRS said that everything was taxable income because they received a 1099 from the brokerage firm or bank holding the Roth indicating only the amount you withdrew. It is up to you to keep track of your basis. On line 15a of the 1040 you indicate the total amount withdrawn from your IRAs. Line 15b then asks you for the taxable amount.

As to the TSP, while distributions directly from the TSP do not qualify for a penalty waiver for higher education, you can roll your TSP to your IRA and withdraw from the IRA to get that waiver. Income taxes still apply, but no penalty. Doing this rollover directly (meaning you don't touch the funds) prevents the 20% automatic withholding as well.


Update to the update - After posting this I got a new accountant and today received a letter from the IRS saying that I will actually be receiving a tax refund. The moral of the story is to not stick with in-laws accountants.




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