Author Topic: Just realized my after tax account is an IRA. FUCK.  (Read 7369 times)

80Westy

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Just realized my after tax account is an IRA. FUCK.
« on: August 20, 2014, 07:40:16 PM »
Hello Mustachians.  Not fellow Mustacians, as none of you would make the mistake that I just discovered.  I have been bopping along for a few months with the idea that my lone after tax brokerage account had a balance around $50,000.  It is linked with my IRA and DW's IRA at the brokerage, so one login allows me to access all 3 accounts.  I have been mentally setting aside this money to cover DD's first two years of college, which would start classes in one year.  The money is still invested, not particularly well, in funds like the front load Seligman Communications and Information fund.  I have been thinking to sell since the market could drop any time, but I have hesitant since I would incur gains this year which would be taxed.  I also have been talking to DW about replacing her gas guzzling 2002 Grand Cherokee with something more mustachian, also thinking the account could be used for that purchase. 

So, it was quite a shock tonight when I realized the after tax account has $507, and the linked IRA's have the $50,000 balance.  Feeling pretty dumb / disorganized right now.  The car purchase is now on indefinite hold.  Wife has reacted well, considering her heart was set on the new whip. 

My question to all you Mustachians:  How can I use the IRA funds for DD's college without getting killed on taxes and early withdrawl penalties?  I have $450,000 combined in previous and current employer 401(k)'s, and $10,000 in home equity.

Thank you for reading about my situation.  Looking forward to great advice and face punches!

usmarine1975

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Re: Just realized my after tax account is an IRA. FUCK.
« Reply #1 on: August 20, 2014, 08:16:39 PM »
http://www.irs.gov/uac/What-if-I-withdraw-money-from-my-IRA%3F.      Should be able to answer your questions.

robotqueen

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Re: Just realized my after tax account is an IRA. FUCK.
« Reply #2 on: August 20, 2014, 08:37:52 PM »
Ouch!
Can you have her apply for two or three scholarships a day? She's bound to get something if she applies her self :)

dragoncar

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Re: Just realized my after tax account is an IRA. FUCK.
« Reply #3 on: August 20, 2014, 08:52:01 PM »
So you paid taxes on this?  Are you going to convert to Roth (extra) tax-free?  Then you could withdraw the converted amount in 5 years with no penalty.

Until then, could use student loans?  Are the interest rates any good these days? 

Or just pay for tuition out of pocket at the expense of savings if your income is up to the task.

And she can get a part time job.

RFAAOATB

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Re: Just realized my after tax account is an IRA. FUCK.
« Reply #4 on: August 20, 2014, 08:54:55 PM »
If The Bank Of Mom and Dad can not justify allocating an early withdrawal to fund college expenses, then perhaps Uncle Sam can pay for college either through an ROTC scholarship or if all else fails, the Post 9/11 GI Bill.


usmarine1975

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Re: Just realized my after tax account is an IRA. FUCK.
« Reply #5 on: August 20, 2014, 08:55:55 PM »
The way I read IRS.org seems like you can at least access this years contributions. I may need to read it again.  I wanted to say using for college might get you out of the penalties but that may only be Roth's

missj

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Re: Just realized my after tax account is an IRA. FUCK.
« Reply #6 on: August 20, 2014, 10:19:34 PM »
It looks like you'll have to pay your regular taxes on it, but won't be subject to the 10% penalty if the early withdrawl is for qualified higher education expenses for you, your spouse, or the children or grandchildren of you or your spouse.  Page 58 of this document: http://www.irs.gov/pub/irs-pdf/p590.pdf

However, I'm still of the opinion that mom and dad don't need to be footing the entire bill for college expenses.  Helping is fine, but I think having some skin in the game is an important character building piece of attending college.  There will be exceptions of course, but I think full ride scholarships from the bank of mom and dad are a crutch that is not nearly as appreciated as it should be. 

+1 to the community college idea, then off to state university if the grades are up to par and your student has a clear goal of how to achieve their degree in  relevant major.  Maybe this "woops" with the IRA will serve as perfect excuse for explaining to you wife and child why community college is now the only possible avenue that you can afford (unless she wants to rustle up her own funding some how).

My big sister, upon getting the news from mom and dad about getting "help" with community college, joined the army to get better education benefits.

when my parents gave me the same news, I got a job at starbucks and worked my ass off and only took the classes that were necessary to my degree.

when my parents gave my little sister the same news (which she was expecting by now) she became valedictorian of her high school, and got several scholarships.

If our parents would have had fat college funds for each of us, we would have blown through that money like there was no tomorrow and still ended up with degrees (except my parents would be about $150k poorer).  Instead, knowing we had to rely on ourselves for most of our educational expenses, we all got through college in our own unique ways and we all came out of it with a strong work ethic and an appreciation for money and achievement.

what doesn't kill you makes you stronger, and so forth  :-)
« Last Edit: August 20, 2014, 10:24:11 PM by missj »

RFAAOATB

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Re: Just realized my after tax account is an IRA. FUCK.
« Reply #7 on: August 21, 2014, 12:01:01 AM »

However, I'm still of the opinion that mom and dad don't need to be footing the entire bill for college expenses.  Helping is fine, but I think having some skin in the game is an important character building piece of attending college.  There will be exceptions of course, but I think full ride scholarships from the bank of mom and dad are a crutch that is not nearly as appreciated as it should be. 


As a counterpoint, my parents covered my entire tuition to a state University.  Having little ambition of my own I picked the major my dad wanted and failed out the first year.  After a semester of academic suspension I switched to a different major and through a heavy course load and summer classes I graduated on time.  If I was allowed to give up completely after failing that year I may not have ever gotten a degree and would be worse off today.

If the children do not work for or value their education with the rationality we have today, are you prepared to watch them fail?  I would hope watching your children fall into debt and low wages would hurt more than writing a few checks.  If I am any indication, if they aren't appreciated now, they will be in the years to come when you realize how lucky you are.

niatpac

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Re: Just realized my after tax account is an IRA. FUCK.
« Reply #8 on: August 21, 2014, 06:11:40 AM »
If you didn't realize these were IRA contributions then....  did you not deduct them on your tax reutrns as deductible IRA contributions?  If not then maybe you have some amended returns to file for the past three years to get some refunds back....

ZiziPB

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Re: Just realized my after tax account is an IRA. FUCK.
« Reply #9 on: August 21, 2014, 08:09:57 AM »
If you didn't realize these were IRA contributions then....  did you not deduct them on your tax reutrns as deductible IRA contributions?  If not then maybe you have some amended returns to file for the past three years to get some refunds back....

Or maybe if they were not deducted, they are Roth IRAs and not traditional IRAs?  If that is the case, I believe you could access them for educational expenses.

dragoncar

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Re: Just realized my after tax account is an IRA. FUCK.
« Reply #10 on: August 21, 2014, 08:24:36 AM »
If you didn't realize these were IRA contributions then....  did you not deduct them on your tax reutrns as deductible IRA contributions?  If not then maybe you have some amended returns to file for the past three years to get some refunds back....

Or maybe if they were not deducted, they are Roth IRAs and not traditional IRAs?  If that is the case, I believe you could access them for educational expenses.

OP, pls.  We are speculating wildly at this point.  When you make IRA deposits you have to specify contribution year.  This wasn't a red flag for you?  Is this really a non-deductible trad IRA?  What's you income?

Cpa Cat

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Re: Just realized my after tax account is an IRA. FUCK.
« Reply #11 on: August 21, 2014, 08:54:33 AM »
The money is still invested, not particularly well, in funds like the front load Seligman Communications and Information fund.  I have been thinking to sell since the market could drop any time, but I have hesitant since I would incur gains this year which would be taxed. 

On the bright side: Sell that BS.

frugalnacho

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Re: Just realized my after tax account is an IRA. FUCK.
« Reply #12 on: August 21, 2014, 09:36:08 AM »
I agree, how do you accidentally get $50,000 into your tIRA?  That is several years worth of contributions.  You didn't include that on your tax forms since you didn't know, so shouldn't you be able to file amended returns and get a refund?

teen persuasion

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Re: Just realized my after tax account is an IRA. FUCK.
« Reply #13 on: August 21, 2014, 10:17:30 AM »
Speculating wildly, indeed.  I'm guessing that the OP  meant that he was viewing the combined totals of his and wife's IRAs and taxable account, and mistook the total for that taxable balance.

Regarding paying for college - Google EFC formula 2014-15.  You should find the manual for calculating your EFC, to see how much DD will need for college this year, and the factors that influence it.  Family size, number of kids in college, AGI, taxable/savings accounts are all important.  Your retirement accounts, primary residence are NOT considered, so having more in retirement and less in taxable is good here.  Have DD visit her HS guidance office to apply for all scholarships available.  Work to improve her SAT as much as possible.  Apply to multiple colleges, aid varies greatly from school to school, and is at least partially a function of how much a school wants you.  She can petition the financial aid office for an increase.  They can refuse, but they might do it, especially if another school is offering more, just to keep you.  DS2 used this technique - he really wanted school 1, but school 2 offered more aid.  He asked school 1 to up their offer, they asked to see the competition's offer, and beat it.  Also make sure you know the details of all institutional scholarships and grants available.  DD1 missed out on a full ride scholarship because she thought her SAT scores sent to a school were "good enough", and didn't update them when she got higher scores.  She only learned of that scholarship in her acceptance folder, and realized after the deadline that she'd have qualified if they knew of her new scores.

Your EFC is based on the previous year's tax return, so if this is your DD's senior year, you will be filling out the FAFSA in January and using 2014's income.  If your AGI is below $50k and you meet some other criteria, assets are excluded, which is very good.  This means that maxing 401ks is useful, even if the FAFSA later adds that back to income.  If you can get below $24k and meet criteria, you get an automatic EFC = 0.  Auto EFC zero was easier before they dropped the income level from $32k.

dragoncar

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Re: Just realized my after tax account is an IRA. FUCK.
« Reply #14 on: August 21, 2014, 10:32:47 AM »
Speculating wildly, indeed.  I'm guessing that the OP  meant that he was viewing the combined totals of his and wife's IRAs and taxable account, and mistook the total for that taxable balance.


That makes a lot more sense.  I still don't know how you can think you  have $50k in taxable when you've only deposited $500, but.... that's me.  I tend to remember large deposits.

frugalnacho

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Re: Just realized my after tax account is an IRA. FUCK.
« Reply #15 on: August 21, 2014, 10:41:12 AM »
Speculating wildly, indeed.  I'm guessing that the OP  meant that he was viewing the combined totals of his and wife's IRAs and taxable account, and mistook the total for that taxable balance.


That makes a lot more sense.  I still don't know how you can think you  have $50k in taxable when you've only deposited $500, but.... that's me.  I tend to remember large deposits.

I don't think that makes any more sense.  How do you think you have $50,000 set aside when you have not deposited anything?  Where did he think that money was coming from?

dragoncar

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Re: Just realized my after tax account is an IRA. FUCK.
« Reply #16 on: August 21, 2014, 11:28:09 AM »
Speculating wildly, indeed.  I'm guessing that the OP  meant that he was viewing the combined totals of his and wife's IRAs and taxable account, and mistook the total for that taxable balance.


That makes a lot more sense.  I still don't know how you can think you  have $50k in taxable when you've only deposited $500, but.... that's me.  I tend to remember large deposits.

I don't think that makes any more sense.  How do you think you have $50,000 set aside when you have not deposited anything?  Where did he think that money was coming from?

Money fairy.  By "more sense" I mean that interpretation fits better with the wording of the original post.

frugalnacho

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Re: Just realized my after tax account is an IRA. FUCK.
« Reply #17 on: August 21, 2014, 11:32:49 AM »
Yea I gotcha.  Still mind blowing that you could be mentally accounting to use that money when you never put it there in the first place. 

bugbaby

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Re: Just realized my after tax account is an IRA. FUCK.
« Reply #18 on: August 21, 2014, 12:27:49 PM »
You may use IRA for qualified college expenses without the 10% withdrawal penalty but you pay income taxes on the amount. See IRS Pub 970 ch. 9.  If you never claimed tax deduction on your IRA contributions because you were unaware , you can file tax amendment for the past 3 years.

80Westy

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Re: Just realized my after tax account is an IRA. FUCK.
« Reply #19 on: August 21, 2014, 05:49:17 PM »
Thanks for the thoughtful responses and advice.  The IRS links were spot on to the issue and at least show no penalties are needed to use the funds for college expenses. 

Teen persuasion nailed it - I have been viewing the balances through Mint (daily!) and mistook the $50,000 for the taxable account balance when it was the IRA balance.  Similarly, a the actual brokerage webpage gives the combined balance, and I just thought...  I have no excuse for this situation - my own inattention is the sole cause.

All of the funds deposited in the IRA have been there since around 1998 when I rolled a 401(k) balance into that IRA.  I have not contributed to the IRA since then. I will be selling the BS, Cpa cat, as you suggested.  No worries about capital gains in an IRA....

The taxable account does not receive regular contributions either.  I think that the last deposit was from sale of house in 2005.  A large withdrawl soon after for down payment on current house was followed by years of no transactions.  I cashed out $16,000 to pay credit card debt in January 2014 soon after finding MMM and reading the "hair on fire" post.  Still have $5k credit debt (0% until November 2014, paying $250/month) and DW student loans $4600 at 2.3% (paying min which is $170/month).  I have done all my saving through 401's and have not managed to save after tax money for years.

Since finding MMM 7 months ago, I have made progress in these areas

- Paid down $25,000 CC debt.  Several thousand were work expenses which were reimbused.  Yes I paid interest on these charges!  5k to go.
- Not paid cc interest since April..  Yes this is an accomplishment for me.  I may end up paying some once 0% offer expires.
- Acknowledged a SL of DW that we had never paid on, didn't know how to contact the creditor or the balance at firsg, which was $7800.  Paid.  Was accruing at 6.8%.
- Tracking and categorizing expenses in Mint. Lots of work remaining  to get them under control.
- Left Sprint for RW (DD) and Ting (me mil DW)
- Dropped collision coverage, increased deductibles to max allowed $1000 for liability.  Need to check comp.
- Got serious about dropping liability on Neon (it's parked) when Vanagon is out of garage for the summer and vice versa.  Same story for boat - will be dropping all coverage once summer ends.
- Increased house deductible to $5k.  Why not?  I have $50k at the ready after tax! Need to reconsider this one.

DD will be applying for scholarships as a job this fall.  She did well on ACT, so I am hopeful but not counting on anything.  Have discussed military for GI bill but she is not interested so far.  She is talking med school...

I cannot read the replies well from this phone, so I will post this and check if I missed any questions.  Thanks again!

teen persuasion

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Re: Just realized my after tax account is an IRA. FUCK.
« Reply #20 on: August 21, 2014, 06:57:11 PM »
If you opt to use some of the IRA to pay for DD's college costs, be aware that not only will there be the tax hit, the cashed out portion will increase your AGI, which will affect any aid she gets the following year.  It will look like you have more income, and thus qualify for less aid.

80Westy

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Re: Just realized my after tax account is an IRA. FUCK.
« Reply #21 on: August 21, 2014, 07:28:07 PM »
Looks like we can't withdrawl until the year we start incurring expenses, which would be 2015.  So we'll at least have the first year without the pumped up AGI for fafsa purposes.

What I would like to do is get wife to agree to cut expenses drastically and pay for college out of current earnings.  Then when college ends we'll have a much lower monthly expense amount, making FIRE that much closer.