Think of your IRA When Planning for Higher Education Expenses

Careful planning for future education expenses is becoming more common as the national average for college tuition costs continue to rise. Many savers are already familiar with tax-advantaged vehicles such as the 529 Plan or Coverdell Savings Account but did you know that all IRA account structures offer certain incentives for educational expenses as well? This article explores IRS Publication 970 and the exception to additional tax on early IRA distributions for qualified education expenses.
When it comes to taking IRA distributions an additional 10% penalty is imposed for withdrawing funds before the designated retirement age of 59 ½. This additional tax applies to the Traditional IRA account structure but also includes SEP IRAs, SIMPLE IRAs, and Roth IRAs. Note that early distribution penalties may be as high as 25% for SIMPLE IRAs.

If you decide to withdraw from an IRA to pay for higher education expenses for either yourself or others, you may be able to avoid the 10% penalty that would normally be imposed. Let’s take a closer look at the eligibility requirements below.

Who is eligible for the exception? 
This exception applies to: yourself as the IRA owner, your spouse, or your or your spouse’s child, foster child, adopted child, or descendant of any of them. 

What is considered an eligible education institution? 
Eligible institutions include: any college, university, vocational school, or other postsecondary school eligible to participate in a student aid program administrated by the U.S. Department of Education. 

What types of expenses are considered ‘qualified’ education expenses (QEE)?
  • Tuition
  • Fees
  • Books
  • Supplies
  • Equipment required for enrollment or attendance.
  • Services for special needs students in connection with their enrollment or attendance. 
  • Room and board if the student is enrolled at least half-time. Half-time status is determined under the standards provided by each individual institution.
    • See Publication 970 for specific details on room and board.
 Be sure to review IRS Publication 970 for additional details, considerations, and examples. The information provided in this article is for educational purposes only and is not guaranteed to be reliable. Always see a qualified tax professional who can offer advice and guidance. New Direction IRA does not offer tax, legal, or investment advice.
 

Add a comment

Loading