IRAs are great for retirement accounts, but that’s that all!
There are many little-known uses for an IRA to shelter money from taxes.
Normally when you pull money out before retirement, you are penalized with an additional 10% tax, but here are some ways to avoid that extra fee…
1. Paying for School
That’s right! You can use an IRA as an education investment account to pay for college. This not only includes your own college, but also your spouse and any of your children. The downside is that IRA distributions are considered income on financial aid applications, so this may affect the amount of financial aid you receive. Depending on your situation, you may benefit more from an IRA as a savings account or a 529 may be better for you.
2. First Home Down Payment
If you qualify as a first time homebuyer, meaning you have not owned a home in the past 2 years, then you are eligible to take up to $10,000 out of an IRA for a down payment on a house without paying the 10% fee. This applies to buying, building and re-building a home.
3. Medical Expenses
You can use an IRA to cover unreimbursed medical expenses, if the total medical expense exceeds 7.5% of your adjusted gross income.
4. Tax-Free Gifting
With estate-planning comes another great use for an IRA. If you contribute to a Roth IRA and you name your children and/or grandchildren as the beneficiaries, you pass that money to them and they are able to pull the money out, tax-free.
5. Disability Pay
If you become disabled and unable to work, you can draw income from your IRA as long as you provide documentation of the disability. If you are able to receive Social Security disability then this would be extra money on top of that.
Overall an IRA has a vast amount of uses, but if you are caught in an emergency, an IRA should be your last resort. It should also be noted that these are different ways of using an IRA, but you should only take advantage of these if that is your initial purpose in investing in the IRA. Simply put: it shouldn’t be a last minute decision to pull a down payment for your home out of your retirement money. All of the usual rules apply when using money for these purposes. A Traditional IRA would still be hit with an income tax on the money you pull out and a Roth IRA would be tax-free income.
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