Penalty-free distributions have been available beginning January 1, 1998 from IRAs if used to pay higher education expenses for a taxpayer or spouse, and any child or grandchild of either. Effective January 1, 2002 the annual contribution limits increased from $500 to $2000 and expansion of the rules allows that these funds may now also be used for elementary and secondary education expenses, as well as higher education expenses.
- required equipment
- room and board
- graduate courses
The amount of education expenses is reduced by tax-free scholarships and other tax-free assistance.
NOTE: Penalty-free education distributions cannot be made from qualified retirement plans.
Qualified plan participants whose plans permit, may want to consider transferring funds to an IRA for penalty-free educational distribution.