Should I pay college loans with money from an inherited IRA?

Q. My son is graduating from college this year and has about $50,000 in student loans. I never wanted him to borrow, but we didn’t have enough to pay cash. Now I inherited an IRA and want to use that money to pay off his loans. I am still working and also saving for my retirement. Do I have to pay it all at once or do I just have to cover its monthly payments?

– Dad

A. That’s an excellent question.

First, be aware that the U.S. Department of Education has extended the student loan payment pause through August 31, 2022. This means for eligible loans, a suspension of loan payments, an interest rate of 0% and no recovery on defaulted loans.

Before making a decision, consider that you will pay federal and state taxes when you withdraw from the inherited IRA, Bill Connington of Connington Wealth Management told Paramus.

“It would be important to know how much tax you will have to pay, which will reduce the amount of dollars you have to pay the debt,” he said. “Liquishing that inherited IRA can push you into the next tax bracket.”

Taxes are also an issue when you decide to pay the loans in a lump sum or with monthly payments, he said.

“If you look at it as a lump sum, you have to pay all the taxes up front and that might push you into a different tax bracket, whereas monthly payments would cover your RMD on that account and might not push you not be at a higher tax bracket.”

But the most important thing is to consider what this inherited IRA means for your retirement.

While getting rid of student debt is admirable, you won’t be able to borrow money to fund your retirement. So make sure you can afford to make those payments for your son before you do anything.

Send your questions to [email protected].

Karin Price Mueller writes the Bamboos column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. To find NJMoneyHelp on Facebook. Register for NJMoneyHelp.comit is weekly e-newsletter.

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