« on: August 03, 2004, 12:20:52 PM »
That's a good point, but there are a few caveats that everyone should consider carefully and plan for before they do it:
1. The credit is limited to 20% of qualified expenses paid. Tuition qualifies, but not room and board, books, travel, etc. And the qualified expenses get reduced for any scholarships, PELL grants, etc. applied against it.
2. The credit begins to phase out (is reduced) at $42K of Adjusted Gross income (which includes the distribution) for single filers; $84K for filing jointly. At $52K single, $105K jointly, it is gone (but not the tax on the distribution, which gets higher as your taxable income increases.)
3. The distribution could be taxed at greater than 20%, depending on your taxable income (which again includes the distribution.) If your tax bracket is 25% and you take $10K and use it all on qualified expenses, you will pay $2,500 in taxes and get a credit of $2,000. If you are in a 15% tax bracekt, you would pay $1,500 in tax and still get the 2,000 credit. That's not including any state taxes.
4. The credit is non-refundable, meaning it can only reduce your tax to $0 and you get back all your actual withholdings. But any extra credits are lost.
5. The money out of the IRA can never be put back. You will lose the benefits of it earning a tax deferred return until you retire (maybe 50 years) and withdraw it. That's the biggest drawback.