Can Roth IRA’s be used for college as payment

Submitted by Zachariah Hammel on Wed, 2014-05-21 03:42

I was recently told by someone that Roth IRA’s can be used to save for college and then used for payment without an IRS fee. Is this correct?



Submitted by Alan - IRA critic on Wed, 2014-05-21 15:31

If it is your own Roth IRA or the Roth IRA of your parent, distributions to pay qualified higher education expenses will not be subject to the 10% early withdrawal penalty even if earnings are distributed. Ordinary income taxes will be due on any earnings distributed, but the earnings come out last, so just taking out the amount of the contributions made to the Roth will not trigger any taxes or penalty. The distribution is reported on Form 8606, and if it is large enough to tap into the earnings, you would need a Form 5329 to claim the penalty exception.



Submitted by Zachariah Hammel on Wed, 2014-05-21 15:40

How long has this rule or sub rule been in force?



Submitted by Alan - IRA critic on Wed, 2014-05-21 16:50

Since Roth IRAs started in 1998. The penalty exception only applies to traditional IRA distributions, but ordinary income tax is still owed on TIRA distributions. Be sure you know the definition of qualified higher education expenses, and take the distribution in the same calendar year the expenses are paid. You cannot use the exception on student loan payments. See p 58 and 71 here:http://www.irs.gov/pub/irs-pdf/p590.pdf



Submitted by Zachariah Hammel on Wed, 2014-05-21 21:49

Thank You!



Submitted by unknown on Fri, 2014-05-30 17:22

Why would earnings distributed from a Roth IRA be taxed?  Is that because it’s early withdrawal?



Submitted by Alan - IRA critic on Fri, 2014-05-30 17:50

Yes. Distributions of earnings before the Roth is qualified (both 5 years and age 59.5) are taxable, although they come out only after all regular and conversion amounts have already been distributed.



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