Certified Public Accountants

Mosford, Barthel & Co., PLC.

Mosford, Barthel & Co., PLC. is a local accounting firm with offices located in Monticello and Elk River, MN.  The firm was founded in 1976 by Bob Mosford, CPA/PFS, and has continued to grow along with Monticello, Elk River, and the surrounding communities.

Roth IRA for Educational Purposes

 

How a Roth IRA can help you save for educational purposes…

 

With the cost of education continuing to increase, parents and their children need to find a method of saving that meets both their educational and tax needs. One method of saving for educational purposes that can meet both of these needs, is to use a Roth IRA. When most people think of Roth IRA's, they immediately think of retirement. However, what many individuals are not aware of is that special rules exist allowing for distributions of a Roth IRA for educational and other qualifying expenses before retirement.

Before we precede any further, you need to have a good understanding about what a Roth IRA account is, and how it is different from a traditional IRA. A Roth IRA account is similar to a traditional IRA account, with one major exception. Under a traditional IRA account, taxpayers receive an adjustment (reduction) to their AGI for contributions that they make to an IRA account, which in turn lowers the amount of tax liability for the year the IRA contribution is made. Once the taxpayer takes a distribution of his/her traditional IRA, the taxpayer will be taxed on the whole distribution (both original contribution amount and any gain).

A Roth IRA differs in that taxpayers do not receive and adjustment (reduction) to their AGI when they make contributions to a Roth IRA account, but they are not taxed on any distributions taken once they reach age 59 1/2, this includes any return you receive on the IRA account! Before you reach age 59 1/2 you can take distributions on the original contributions (not any gains) that you have made to the Roth IRA account, and avoid any penalties or additional tax, provided that the reason for your distribution is for a qualified expense. In addition to qualified post-secondary educational purposes, these qualified expenses also include certain medical, insurance, disability, IRS levies, and death expenses.

For example, if an 8 year-old contributes $2,000 every year for 10 years, and assuming a 10 percent rate of return and that the child shelters the earned income via the $4,700 standard deduction, the child will see the total contribution grow to over $30,000. When the child then turns 18 and attends post-secondary school, he or she can withdraw $20,000 for educational purposes (sum of the contribution excluding any gains).

 

This may sound like a wonderful plan to many people, but the question that is going through everyone's mind is probably, "How does an 8 year-old have earned income?" One option that parents have is to pay there child $6.50 per hour to do housework for 6 hours per week. The parents will then need to issue their child a W-2 at years end. In most instances the child's income will be sheltered by the standard deduction, and the child will be able to make a contribution towards his/her education while learning a little about saving for future needs.

Monticello Office:

305 Cedar Street, Suite 201

Monticello, MN 55362

Tel: (763) 295-4800

Fax: (763) 295-4804

 

Elk River Office:

812 Main Street, Suite 210

Elk River, MN 55330

Tel: (763) 441-1384

 

Email: amoll@mbcocpa.com

 

Directions:

Select office location below for Mapquest directions:

· Monticello

· Elk River

To contact us:

Copyright © 1999-2008 Mosford, Barthel & Co., PLC.