If you’ve done particularly well over the years with your self-directed IRA, then you may start looking closer at its potential to help you accomplish things beyond just funding your retirement. Retirees who have multiple sources to pay their retirement expenses – various IRAs, employer pensions, Social Security, savings and investments in non-retirement accounts, real estate holdings, etc. – can pick and choose how they use the funds from their different accounts.
Even though IRAs were created for the sole purpose of allowing individuals to save for their own retirements, there are our various exceptions that let these individuals withdraw funds for other purposes. In some cases, meeting the requirements of specific exceptions will allow an individual to withdraw funds early without having to pay the early withdrawal penalty that would otherwise be due.
Taxes Still Due With an Early Withdrawal. As a threshold matter, it’s important to understand that permitted early withdrawals are still subject to whatever tax would otherwise be owed on the withdrawal. So, for example, taking permitted early withdrawals from your self-directed traditional IRA would still cause you to incur a tax liability for that year. (A permitted early withdrawal from a self-directed Roth IRA would not be subject to tax because withdrawals from Roth IRAs are generally tax-free.)
Qualified Educational Expenses. One significant exception to the penalty for early withdrawals is being able to take money out in order to pay for qualified educational expenses at an eligible educational institution. Just about any school costs and fees will be eligible, including tuition, books and supplies, and fees and equipment that the school requires. The student must be attending an eligible educational institution, which simply means that the institution is eligible to participate in federal student aid programs. This will include not only accredited two and four year institutions, but many online and vocational schools as well.
There is no limitation on the amount that can be permissibly withdrawn early, so this is a very powerful tool you have available to help your grandchildren. In addition, because some parents may be shortchanging their own retirements in order to pay for their children’s educations, helping your grandchild may also allow your adult child to save more for their own retirement.
Down Payment on Starter Home or Condo. Another way to help your grandchild using your self-directed IRA is to take an early withdrawal in order to help them buy their first home. With a properly sized starter home or condominium, your grandchild can build equity and use their financial stability to take control of their own financial future.
There is a restriction that the homebuyer not have owned their own home for the past two years, and the penalty free withdrawal amount is limited to $10,000. But note that if multiple parents and grandparents each withdraw the maximum permitted amount, the child can have a significant head start on putting together a down payment. Another important limitation is that the $10,000 amount is a lifetime limit, so if you want to help multiple grandchildren then you’ll need to divide up that $10,000 amount as you see appropriate.
Even though self-directed IRAs were created to help individuals save for retirement, there are provisions that let you withdraw money early to help your grandchildren in various ways.
Quest Trust Company helps change people’s lives and financial future through self-directed IRA investment education. Quest Trust Company helps people invest in what they know best and build their financial future on their own terms.