IRA distributions for college education…
How do the penalties and income taxes apply when withdrawing money out of a pre-tax traditional IRA and to Roth IRA’s when using for college/higher education expenses?
How do the penalties and income taxes apply when withdrawing money out of a pre-tax traditional IRA and to Roth IRA’s when using for college/higher education expenses?
Permalink Submitted by Alan Spross on Wed, 2009-05-20 21:29
From a Traditional IRA where there is no basis from non deductible contributions, the distribution is taxable as ordinary income, but the early withdrawal penalty is waived when the expenses are qualified.
For a Roth IRA, the ordering rules apply. The first dollars out come from regular contributions tax and penalty free. Once these are exhausted, conversion dollars are next out. These are tax free, and the 10% penalty for conversions under 5 years is waived if the expenses are qualified. Roth earnings come out last, and these would be taxable, but the penalty would be waived for qualified education expenses. Of course, once the Roth is fully qualified, all withdrawals are tax and penalty free.
The IRA tax rules for these distributions is the easy part. More complex is the timing requirement in connection with expense payment dates, education tax credits, and offsets due to financial aid programs.
Permalink Submitted by Clyde Wolf on Thu, 2009-05-21 19:36
[quote]From a Traditional IRA where there is no basis from non deductible contributions, the distribution is taxable as ordinary income, but the early withdrawal penalty is waived when the expenses are qualified.
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I believe Alan-oniras miss-spoke in the statement above. The statement would be correct for Deductable contributions to an IRA.
The Non Deductable contributions to an IRA have already been taxed. Earnings in this IRA would be subject to income tax when distributed. Each distribution will be part contribution and part earnings.
Permalink Submitted by Alan Spross on Thu, 2009-05-21 20:00
cwolf,
“NO basis” from non deductible contributions = deductible contributions.