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IRA's - Withdrawl for Education
Distributions taken prior to age 59 1/2 that would normally incur a 10% additional tax penalty can be made from your IRAs if used to pay for qualified higher education expenses. You may owe income tax on at least part of the amount distributed, but you may not have to pay the 10% additional tax.
The portion not subject to the additional tax is generally the amount of the distribution that is not more than the adjusted qualified education expenses for the year.
Who is eligible:
- yourself,
- your spouse, or
- your or your spouse's child, foster child, adopted child, or descendant of any of them.
Eligible expenses include:
- tuition
- fees
- books
- supplies
- required equipment
- room and board (You must contact the eligible educational institution for qualified room and board costs)
- graduate courses
The amount of education expenses you are able to claim is reduced by tax-free scholarships and other tax-free assistance. These would include:
- Expenses used to figure the tax-free portion of distributions from a Coverdell education savings account (ESA)
- The tax-free part of scholarships and fellowships
- Pell grants
- Veterans' educational assistance
- Employer-provided educational assistance
- Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance.
Eligible educational institution:
An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education, which includes, for the most part, all accredited public, nonprofit, and privately owned/profit-making postsecondary institutions.
There are some educational institutions located outside the U.S. that also participate in the U.S. Department of Education's Federal Student Aid (FSA) programs.
Half-time student:
A student is enrolled “at least half-time” if he/she is enrolled for, at minimum, half the full-time academic work load for the course of study the student is pursuing. This is determined per the standards of the school where the student is enrolled.
NOTE: Penalty-free education distributions cannot be made from qualified retirement plans. Therefore, qualified plan participants whose plans permit, may want to consider transferring funds to an IRA for penalty-free educational distribution.
Disclosure
MEA Financial Services/Paradigm Equities, Inc. does not give tax or legal advice. The comments regarding the law and tax treatment simply reflect our understanding of current interpretations of such laws. Since laws are always subject to interpretation and possible changes, we recommend that you seek the counsel of an attorney, accountant or other qualified tax advisor regarding these matters as it applies to your particular situation.
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