Purchasing Credits in a Retirement Plan

Dear Retirement Adviser,

Would there be a penalty or interest charged against our Roth individual retirement account if we used a portion of it to buy years in another retirement plan? The Roth was begun with an IRA rollover in 1997. Since retiring from the military in 2010, my husband has been a teacher. He will be able to buy five years toward his teacher's retirement fund at the end of the next school year.

We believe it would be more beneficial to us to have the additional five years compared with drawing against the Roth at retirement. The teacher's plan would give us more monthly income in retirement. My husband will be 65 in 14 years. Buying five to seven years worth of credits, he could retire at age 60 and get approximately $2,200 per month in teacher's retirement benefits.

Thank you,

- JoAnn Jumpstart

Dear JoAnn,

Every plan I've looked at does not allow funds from a Roth IRA to be used to directly purchase service credit by direct rollover or a trustee-to-trustee transfer from the account. Your husband can double-check with the plan administrator to confirm this for his plan, but I expect this is the case.

Contributions to a Roth IRA are made with after-tax dollars. For early distributions before age 59 1/2 that meet the IRS seasoning requirement of five years, only the investment earnings are subject to taxation and the 10 percent penalty tax. Raiding the account to help fund the lump-sum or installment payments is possible. But you can't transfer the funds to avoid these taxes. The IRS rules for distributions from of a Roth IRA allow your husband to manage the tax impact by taking earnings on contributions out of the account last, if the money is withdrawn over time.

I'd suggest working with an accountant to determine whether it's better to raid the account all at once to help with the lump-sum payment. The alternative is to take the money out over time to finance the installment payments.

Note: I'd like to thank Kay Bell, Bankrate's tax columnist, for her help with my reply.

Get more news, money-saving tips and expert advice by signing up for a free Bankrate newsletter.

Ask the adviser

To ask a question of the Retirement Adviser, go to the "Ask the Experts" page and select "Retirement" as the topic. Read more Retirement Adviser columns and more stories about retirement.

Bankrate's content, including the guidance of its advice-and-expert columns and this website, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this website is governed by Bankrate's Terms of Use.