AboutGlenn D Schnabel Expertise I can answer most federal individual income tax questions.
I can not provide legal advise.
Experience I have worked for a CPA firm for over 11 years.
I have worked in private as well as government
I have recently been running a tax preparation office, mainly focusing on
individual income taxes
Organizations I have been affiliated with managing condo associations and as a member of a coalition to educate condo owners as to their rights and responsibilities.
Education/Credentials I have my B.S.B.A in Business Administration . Concentration in Accounting
I have gone to yearly tax seminars and have tried to keep up with the
evolving tax changes
Awards and Honors Over my years I have received local awards for contributions to worthy
organizations.
Past/Present Clients This, of course remains confidential
Expert: Glenn D Schnabel Date: 7/11/2008 Subject: Pay tuition from IRA
Question QUESTION: Hi Glenn,
Thank you for answering my questions from earlier post. I hope you can answer two more.
1. Is it true that if he pays the tuition directly from TIAA account, he doesn't need to pay the income tax and penalty?
2. Does he needs to pay income tax if he rollover to IRA and pay the tuition directly to the school from the IRA?
May be this the best way. What do you think?
Diana
ANSWER: Diana,
Thank you for your follow-up questions.
1)1. Is it true that if he pays the tuition directly from TIAA account, he doesn't need to pay the income tax and penalty?
No. He needs to rollover the money to the IRA account and then pay the tuition costs from the IRA. You would need to check with TIAA whether if they have a provision in their plan about this. The penalty would be avoided if you use the rollover into an IRA and the distributions are for tuition costs.
2)Does he needs to pay income tax if he rollover to IRA and pay the tuition directly to the school from the IRA?
He will still have to pay taxes on the distributions, but he will be able to avoid any penalties
3)May be this the best way. What do you think?
There may be a third choice and that is to see if there ia a provision whereby he can borrow the money. This way he can borrow the money from TIAA and not have to pay taxes on the distributions since they are considered loans. He would have to pay interest on the loan though.
The second choice seems to be the best way.
Hope this is helpful
---------- FOLLOW-UP ----------
QUESTION: Hi Glenn,
I have another set of question about my daughter's annuity account. When she was 5, I started saving for her college fund. From a book that I read, it suggested the money goes to an annuity account. It did mention that when withdraw there will be 10% penalty but the gain will out pace the penalty. Since the kid's income is low, income tax should not cause a big problem. The money in the account grow double now. I like to take the money out to pay for her college expense.
1. How do you know the money count as principle or gain if you are only taking out part of it?
2. I think the law may have changed from 14 year ago. Do you know there is better way to pay the college expense from this kind of account?
Diana
Answer Diana,
Thank you for your questions.
1)How do you know the money count as principle or gain if you are only taking out part of it?
The vendor will usually carry the records to distinguish between what was contributed by the taxpayer in form of premiums paid. There is an allocation between your contributions versus how much is in the fund and the annuity value. When distributions are made, there would be a taxable and a non taxable amount determined. A 1099R would be issued, accordingly(at the end of the year).
2)I think the law may have changed from 14 year ago. Do you know there is better way to pay the college expense from this kind of account?
The way college expenses may be paid are setting money aside into a college savings plan offered through a state. Since the money is a contribution, the interest is deferred until the payments are made.
Another way is through financial aide (The FASFA) , where a means test is used to determine what the student is entitled to and any difference is picked up by a contribution from the student and the parent. Scholarships, low interest loans are available whereby the student does not pay until eight months after graduation.
