Roth Distributions for college
If a Roth IRA owner completely cashed in a Roth IRA to use for college expenses am I correct that the contributions will come out tax free, the earnings will be taxable, but they will avoid the 10% penalty if they use if for college expenses such as tuition, books, room and board? And does the 5 year rule apply to any of this?
Permalink Submitted by Alan - IRA critic on Wed, 2014-07-16 01:09
The 5 year holding period is not a factor unless Roth owner has also reached 59.5. As long as the distribution is taken in the correct year and the expenses are qualified higher education costs, the 10% penalty will not apply. The penalty waiver is claimed using Form 5329. Check out Pub 590 regarding the definition of what expenses are qualified and whose expenses are qualified.
Permalink Submitted by Jack Thomas on Wed, 2014-07-16 21:00
And any funds that represent contributions are tax free no matter what the purpose of the funds, correct?
Permalink Submitted by Alan - IRA critic on Wed, 2014-07-16 21:16
Yes, that is correct. Regular contributions out first tax and penalty free, next conversions oldest first tax and penalty free. Should the distribution get to conversions less than 5 years old, the higher education exception will waive the 10% penalty on those conversions. Last out are earnings and the exception will also waive the penalty on earnings, but not the ordinary income tax on the earnings.