withdrawing from IRA to fund for college
I have been told that with a Roth or Regular IRA you can withdraw up to 10K per year per child for college expenses if the account has been open for 5 years and you will not be penalized.
I would like to clarify that the ROTH money will come out tax free, just as if it was used for retirement and that for Regular IRA money you will be taxed as ordinary income on what is withdrawn.
Thank you –
Patty Jenkins, Paraplanner
Permalink Submitted by Alan Spross on Thu, 2007-09-27 03:39
First, there are no dollar limits as there is for the first home exception or per child limits. Those limits apply to tax credits, which are different than IRA penalty exception issues.
For a Roth IRA, all non qualified withdrawals must follow the ordering rules. That means that regular contributions must come out first, then conversions, and lastly earnings. The regular contributions come out tax and penalty free, conversions come out tax free based on the oldest first, but subject to penalty if not held for 5 years prior to the distribution year. Earnings are subject to tax and penalty. You can use the qualified higher education expense exception to waive the conversion penalty or the early withdrawal penalty on non qualified earnings. You have to know the amount of qualified expenses and you must offset them by tax free scholarships, grants, Coverdell distributions etc.
A traditional IRA (TIRA) does not have the Roth ordering rules. Distributions for qualified expenses per above are subject to the penalty on the taxable portion of the distribution, and the qualified expense exception will waive that penalty.
These distributions must also be taken in the year the education expenses are incurred. They cannot be taken later and applied to a student loan payment.
Education tax issues are among the most complex when you have to consider eligibility for tax credits, the amount and type of financial aid accessible, and timing of expense payments in relation to taxable year and IRA penalty waivers if IRAs distributions are taken in such a year.