10% Penalty Question
If one has two sons, one is almost 22 years old and one is 25 years old and is about to get married. The 21 year old is a full time student and is going on to law school as a full-time student. The 25 year old has a full time job and will be taking classes to receive his masters in education. Assuming the parents has not claimed either child as a tax exemption the last couple of years, can a parent use their IRA to pay for both of these children’s tuition, books, fees, room and board, food, computer, internet access, etc. – without having to pay the 10% IRS penalty? Any other thoughts or recommendations you may have would be greatly appreciated
All the above is based on an IRA in which taxes have not been paid. After answering the above would their be any advantage/disadvantage in using the funds from a Roth IRA which has been funded for over 10 years.
Permalink Submitted by Alan - IRA critic on Wed, 2022-04-13 19:49
The higher education expenses can be for most immediate family, certainly children, and of any age, and whether claimed as dependents or not. The student must be at least a half time student for room and board to be considered a qualified HE expense. The penalty waiver would be claimed on Form 5329. Either a TIRA or Roth IRA distribution or combination of both can be distributed, with the main difference being that Roth distributions are not taxable until the Roth basis has been withdrawn and only earnings remain. Earnings remain taxable until the Roth is qualified, usually at 59.5 and held at least 5 years. If Roth conversions are tapped under the Roth IRA ordering rules, the higher education exception will waive the penalty for conversions not held 5 years. I would look at the TIRA v Roth choice as a comparison of your current v future tax rates. If you expect your personal tax rate to be higher in retirement, then you should tap the TIRA, if lower tap the Roth.
Permalink Submitted by Hunter Hudgins on Tue, 2022-05-24 14:14
I appreciate your response to my prior question. Talking strictly about the IRA, can a parent use their IRA to pay for both of these children’s tuition, books, fees, room and board, food, computer, internet access, etc. – without having to pay the 10% IRS penalty?
Permalink Submitted by Alan - IRA critic on Tue, 2022-05-24 14:31
Generally, yes. These must be required by an eligible educational institution. Room and board requires that the student must be at least half time.