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Is there anyway to take a bulk amount of money out of an inherited ira (without having to pay extra tax on it) to pay off my PLUS Loan (which I used to assist my children with college costs?)?

I owe about $10000 on my plus at 6.9-7.6% My inherited ira isn't making any money to speak of. I have about 22000 in the inherited ira. My dividend is about $700 a year

Nov 07, 2012 by C from Foristell, MO in  |  Flag
3 Answers  |  5 Followers
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4 votes

Hi, It's important to note that inherited IRA (also called beneficiary IRA) distributions are not subject to the 10% penalty. Your IRA custodian will denote these as "Death Distributions" and they are not subject to the 10% penalty. However, they will become part of your ordinary income in the calendar year which you take the funds from the IRA. Depending on your tax situation, it may make sense to spread these distributions out over more than one year. Working with a CPA or CFP professional might help you to determine the best course of action.

3 Comments   |  Flag   |  Nov 30, 2012 from Denver, CO

So Say I am in a 25% tax bracket. (12/2012) how does taking a monthly amount out help with taxes? My other choice is to use money received from our refinance (3.25%) to pay off the 6.25-7.25 Parent Loan. Then using the monthly payment I will no longer be making on the education loan and adding it to the house payment.

Flag |  Dec 05, 2012 near Foristell, MO
James D. Osborne, MBA, CFP

C, While your question is getting a bit specific, the general goal of spreading the distribution over multiple tax years is to avoid being pushed into a higher bracket in any single year.

Flag |  Dec 05, 2012 near Denver, CO

Oh, I see. Thanks

Flag |  Dec 06, 2012 near Foristell, MO

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3 votes

Unfortunately, no.

3 Comments   |  Flag   |  Nov 07, 2012 from Amesbury, MA

Is it just because it was an inherited IRA or is this the case with any IRA? I was under the impression the 10% tax penalty is waived for education expenses such as this.

Flag |  Nov 07, 2012 near San Diego, CA
Steve Stanganelli CFP®, CRPC®

The 10% penalty for early withdrawal is waived for qualified education expenses incurred by the taxpayer, spouse, child or grandchild of the taxpayer or spouse. The student need not be a dependent. The exclusion only applies to the 10% early withdrawal penalty. Such a withdrawal is filed on IRS Form 5329.

Flag |  Nov 08, 2012 near Amesbury, MA
Steve Stanganelli CFP®, CRPC®

Please note that for reference you may go to IRS Publication 970. Bear in mind that the amount excluded from additional tax is for the qualified educational expenses paid by the taxpayer DURING the tax year. This may be a sticking point for a strategy where you are using the withdrawal proceeds to pay down PLUS loans from previous years and may be open to interpretation by an auditor.

Flag |  Nov 08, 2012 near Amesbury, MA

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3 votes

It also depends on how old the original owner of the IRA was and when you received it. There is no way to avoid paying income tax, but you may be able to avoid the 10% penalty. The 5 year rule says you can take ALL the money out within 5 years of inheriting it.

As for the low rates of return on your inherited IRA, you may want to check your investments. I see that people will often keep the same investments that their parents had and this can be a mistake.

Either way, this is a good time to check with a Certified Financial Planner in your area.

1 Comment   |  Flag   |  Nov 08, 2012 from Las Vegas, NV

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Flag |  Nov 12, 2012 near Washington, DC

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