You know that a self-directed IRA is an extremely powerful retirement savings vehicle. These accounts offer an attractive combination of tax-deferred (or in the case of a self-directed Roth IRA, tax-free) investment growth plus significant freedom investment choices.
While the account was setup to enable individuals to save for their own retirements, they can be used for other things as well. For example, if you’re in a position to make early withdrawals from your self-directed IRA without compromising your own financial future, you can take early withdrawals from your account to help your grandchildren. Most early withdrawals will incur a financial penalty, but there are two exceptions that are of particular interest.
To Help Them Purchase Their First Home.
One of the early withdrawal exceptions is to permit the account holder to take up to $10,000 out of their account to help them by their first home. You can also help your grandchild by using funds from your self-directed IRA to assist them with buying their own first home. The IRS regulations authorize a penalty-free withdrawal for up to $10,000 to help the account holder buy a new home (provided that they have not owned a home at any time in the past two years), but also for the account holder to help someone in their immediate family, or their grandchildren do the same.
A common problem facing young people is that even if a person can afford the monthly payment on a home mortgage, it can be extremely difficult for that person to come up with enough money to afford the down payment to be able to get that mortgage. If your grandchild is able to get $10,000 for a down payment from you, and additional amounts from their parents or other grandparents, they may be able to purchase a home that can help them build significant home equity to benefit them in the future.
To Help Them Pay College Expenses.
Another way that young people can find themselves in financial difficulties is graduating from college with an abundance of student loan debt. Despite efforts that parents are making to help children pay for college, many families are finding that the costs are simply rising too fast. This is where the help of a grandparent can be extra important.
The rules for self-directed IRAs (allow account holders to take penalty free early withdrawals from their accounts in order to pay for in order to meet the requirements of this exception, the money must be used for tuition, fees, books and other supplies, and in some cases room and board as well. As with the exception relating to a first-time home purchase, the withdrawal can be used to benefit the account holder, their children, or their grandchildren.
These costs and expenses must be incurred at an educational institution that qualifies for federal student financial aid. Just about any two or four year college is going to qualify, but many vocational programs will not. Be sure to check the status of your grandchild’s school before offering to help.