If I use my Roth IRA for graduate education, how to deal with employer's educational assistance later?

michael2020 · ‎April 10, 2020

I am using my Roth IRA for my graduate program tuition in 2020 fall. My employer can reimburse up to $5,250 annually for my tuition (probably in 2021 spring), which is allowed by IRS's educational assistance rule. However, this reimbursement only happens after I pass the exams of the semester, so I have to use my Roth IRA fund.

My questions are:

1. How should I deal with the $5,250 employer reimbursement? Should I put it back to Roth (is that allowed)? Or just keep it in my non-retirement account, such as a checking/savings account.

2. Is that allowed by IRS to first use Roth IRA for tuition, then get an employer educational reimbursement? After all, it looks like a "withdrawal" of Roth IRA and a take-advantage of this no-penalty educational withdrawal.

3. My Roth was from a conversion of my previous company's 401K (first to Rollover IRA, then to Roth IRA) in 2019. I will pay income tax for this conversion for 2019 tax filing. I did some research, but I just want to confirm: I can use the conversion part with no tax and penalty for education, and I can use the earning of Roth IRA with no penalty for education but with income tax.

Thanks!

Hal_Al · ‎April 10, 2020

Q. Should I put it back to Roth (is that allowed)?

A. You have to put it back within 60 days of taking it out. That is a "roll over". You are only allowed one roll over per year.

Q. I can use the conversion part with no tax and penalty for education, and I can use the earning of Roth IRA with no penalty for education but with income tax?

A. Yes. There is a 10% penalty for taking money out of a Roth account (before age 59.5) within 5 years of a Roth conversion. That penalty is waived if the money is used for education.

Q. How should I deal with the $5,250 employer reimbursement (probably in 2021 spring)?

A. You have a choice (actually a tax loop hole). You can claim nothing on your 2020 tax return, since it will be reimbursed in 2021. Or, you can claim a tuition credit, for 2010, because you are out-of-pocket. But, then you would have to treat the (normally tax free) reimbursement as taxable income in 2021. The tuition credit is worth 20%. If you're in the 12% tax bracket, or lower, you come out ahead

Your unlikely to be able to put the money back within 60 days. The money would be better off left in the Roth account, earning tax free money than to be used as short financing. You would, probably, be better off getting a short term loan while you wait for the reimbursement. Check with the school's financial aid office, which may even allow a payment plan.

michael2020 · ‎April 11, 2020

Thank you very much for your advice.

Let's say I insist using my Roth IRA, and I don't mind losing my Roth IRA amount:

Case A:

Step 1: I use Roth IRA to pay for tuition in August, 2020. No withdrawal penalty for education.

Step 2: Company gives me tuition reimbursement in December, 2020, so that $5,250 Educational Assistance applies to Tax Year 2020's IRS annual limit.

Question: By law, should I just feel no guilty of putting the $5,250 reimbursement into my checking account, or put it back to Roth IRA by certain IRS requirement?

Case B:

Step 1: I use Roth IRA to pay for tuition in August, 2020. No withdrawal penalty for education.

Step 2: Company gives me tuition reimbursement in January, 2021, so that $5,250 Educational Assistance applies to Tax Year 2021's IRS annual limit.

Question: By law, should I just feel no guilty of putting the $5,250 reimbursement into my checking account, or put it back to Roth IRA by certain IRS requirement?

Thanks!

Hal_Al · ‎April 11, 2020

Case A Question: By law, should I just feel no guilty of putting the $5,250 reimbursement into my checking account, or put it back to Roth IRA by certain IRS requirement?

Case A Answer: The 60 days is up, you cannot rollover the $5250 into your Roth IRA. However, if you haven't already made a Roth contribution, for 2020, you can do so at that time. Note: the technicality is you are not "putting the money back" (rolling it over), you are making a new contribution. Whether you put the $5250 into your checking account or Roth, the $5250 is still tax free*. There's no guilt involved.

Case B: Question: By law, should I just feel no guilty of putting the $5,250 reimbursement into my checking account, or put it back to Roth IRA by certain IRS requirement?

Case B Answer: The answer is the same as case A. By law, you have until 4-15-21 to make a 2020 Roth contribution.

*If your concern is that getting tax free assistance, and a penalty waiver, is double dipping (2 benefits for the same money), that is allowed in this circumstance.

Since the $5250 is tax free, you cannot claim an education credit on the same amount. That would be double dipping.

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michael2020 · ‎April 12, 2020

Thank you so much. I won't claim the tuition payment in the tax benefit when filing tax. I will only use Roth IRA pay for tuition, receive company's $5,250 tuition support. Based on what you say, this is not double dipping, and I should not feel guilty or have any legal problem. Thanks!