Back to IRA School: Educational Expense Exception to 10% Penalty (Part 1 of 4)

By Jeffery Levine, IRA Technical Expert  

Follow Me on Twitter: @IRAGuru4EdSlott

Can you believe it? We’re now 7 full months into 2012 already.  And while there’s more fun in the sun to be had before summer comes to an end, August has traditionally signaled the start of the back to school season.  With that in mind, we thought we’d spend a little time talking about the educational expense exception to the 10% penalty.

What is it?

In general, if you take an IRA distribution penalty prior to reaching age 59 1/2, it will be subject to income tax and a 10% early distribution penalty.  However, the Tax Code provides a number of exceptions to the early distribution penalty.  If you meet the guidelines for one of these exceptions, you can take a distribution prior to 59 1/2 without incurring a penalty.  Ordinary income tax, however, will still apply.

Whose education expenses can be used to qualify for the exception?

Logically, the education exception can be claimed by your own educational expenses.  Not surprisingly, it can also be claimed for any expenses incurred on behalf of your spouse or children.  Believe it or not, it doesn’t stop there.  The exception can also be used for educational expenses incurred on behalf of a stepchild, and even a grandchild.  What’s more?  They don’t even need to be claimed as a dependent on your tax return.

What types of expenses qualify for the exception?

Tuition is the most obvious expense that comes to mind for most, but the educational expense exception to the 10% penalty can also be used for expenses related to fees charged by an institution, as well as for books and supplies needed for class.  In addition, if the student in question is enrolled at least “half-time,” then certain room and board expenses can qualify for the exception as well.

Next time, we will answer more specific questions about what items or types of schooling qualify for the exception. Come back next Wednesday for that!