Early withdrawal for education expenses
I accepted my exhusband’s entire IRA ($286K) instead of spousal maintenance (we were married 25 years) as a divorce settlement. We have 4 children, 3 of whom are fulltime undergraduate college students. I am a fulltime undergraduate college student as well. Our home does not have any equity so we are trying to “short sale” it; if that doesn’t work we will foreclose on the house. My children and I will be “home-less” soon…my ex is living with his “friend”. I would like to withdraw from the IRA to pay for “college expenses” for myself and my children ($30K/year per person). Is there a limit to the amount I can withdraw from the IRA for “educational expenses” without incurring the 10% penalty? ALSO, I filed FAFSA’s for the 2010-2011 school year. If we receive financial assistance (Pell grant, government student loans, ect.), will the IRS penalize me for withdrawing “too much money” for “educational expenses”? AND, my son is on an academic scholarship that he might lose (due to GPA requirements); if he appeals the scholarships “loss” and gets it back, will the IRS attribute this money to him and claim that I removed “too much” money from the IRA to pay for his “educational expenses”. I would like to buy an older, inexpensive house near the university on a foreclosure auction (CASH REQUIRED) because no one will rent me a home without SUFFICIENT income (I work parttime-15 hours/week @ 9/hr) AND my credit is ruined due to the foreclosure/short-sale so I can’t get a home loan. I would like to use a portion of the money I removed from the IRA to pay for this house (ROOM AND BOARD?) Any APPLICABLE advise would be appreciated…thank you.
Permalink Submitted by mk foss on Sat, 2010-03-13 02:27
In order to avoid the 10% penalty you need to show that you paid out in educational expenses as much as you withdrew from the IRA. The educational expenses include tuition, books, fees and necessary equipment – a dorm qualifies if at least a half-time student. Paying off student loans will not qualify.
If you pay the education costs in one year and get reimbursed for something the next year, it shouldn’t be a problem unless you knew you were definitely going to get something refunded. If you take out too much, then you pay the 10% penalty on the excess. The Form 1099R that you receive will report everything as taxable, when you file your income tax return file Form 5329 and show how much was expended for education – the 10% penalty applies to the overpayments.
Since you currently own a house, you cannot take out anything from the IRA for a home purchase and avoid the 10% penalty.
Remember that the higher education exception only avoids penalty taxes and not income taxes; you will pay tax at ordinary rates on everything withdrawn. Also you cannot use the same expenses to avoid the 10% penalty and for education deductions or credits.