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By Evan Mayhew - November 21, 2018
Retirement and education are two of life's most important investment goals. For retirees who want to contribute to a grandchild's or other student's education, it may make sense to link those strategies. Why? Retirees have a unique income stream that can help boost education savings: required minimum distributions (RMDs).
At age 70½, investors must start taking money—RMDs—out of retirement accounts. After a lifetime of saving, you might rely on that income for regular retirement expenses. But even if you don't need it, IRS rules still require distributions. Then you'll need to decide what to do with the money: Cash it out, add it to another investment account, use it for life insurance premiums, give it to charity or pay for education expenses.
In this article, we'll discuss how using your retirement account RMDs can be a great resource for funding another kind of tax-deferred account: a 529 education savings plan.
Let's start with a quick refresher on RMDs and 529s.
Required Minimum Distributions. Investors in Traditional IRAs and employer-sponsored retirement plans are required to withdraw a percentage of their accounts when they reach age 70½. In retirement, RMDs provide income, as well as allow the government to tax the money rather than allowing it to stay tax-deferred indefinitely.
Annual distribution amounts are based on your retirement plan balance and your life expectancy. Read more about RMD rules and account types.
529 Education Savings Plans. 529 Plans were designed with tax benefits, like retirement accounts, to make it easier to save for education expenses (originally college, but now expanded to K-12 education). 529 earnings grow tax-deferred at the federal and state level and can be withdrawn tax-free for qualified1 educational expenses.2 Some states also offer a state tax deduction for contributions to a 529 Plan (see map).
Last year, 12 percent of college students used money from grandparents (and other extended family and friends) to pay for education expenses.3 If you have to take a distribution, why not keep the money working for the next generation?
Ready to plan your current or future RMDs and get your student's future off on the right foot? Learn more about 529 education savings plan options , or call our experienced Investment Consultants today at 1-800-345-2021.
1 Non-qualified withdrawals are subject to federal and state income taxes and a 10% penalty.
2 Beginning in 2018, distributions for educational expenses for elementary and secondary school (public, private, or religious) will be treated as qualified higher education expenses up to an aggregated limit of $10,000 per student. Amounts over that limit will be treated as taxable income.
3 "How America Pays for College 2018," Sallie Mae® and Ipsos.
4 NOTE: This information is only a summary and not intended as advice. You should consult a financial aid advisor or the U.S. Department of Education's website at www.ed.gov for more information about financial aid.
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The availability of tax or other state benefits (such as financial aid, scholarship funds and protection from creditors) may be conditioned on meeting certain requirements, such as residency, purpose for or timing of distributions, or other factors.
IRA investment earnings are not taxed. Depending on the type of IRA and certain other factors, these earnings, as well as the original contributions, may be taxed at your ordinary income tax rate upon withdrawal. A 10% penalty may be imposed for early withdrawal before age 59½.
You could lose money by investing in a mutual fund, even if through your employer's plan or an IRA. An investment in a mutual fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.