How to Use Your IRA to Pay for Higher Education

Tuesday, February 24, 2015

By Joe Cicchinelli, IRA Technical Expert
Follow Me on Twitter: @JoeCiccEdSlott

On February 12, 2015, the IRS updated Publication 970, Tax benefits for Education, for use in Preparing 2014 Returns. The publication explains the tax benefits that may be available to individuals who are saving for or paying education costs for themselves or certain family members such as children. It includes information on Coverdell Education Savings Accounts (ESAs), qualified tuition programs (also called “529 plans”), student loan interest deductions, education savings bonds, and the education exception to the IRS 10% penalty for early IRA distributions.

Generally, if you take a distribution from your IRA before you turn age 59 ½, you’re subject to a 10% penalty on the early IRA distribution. The penalty is in addition to the income tax you’ll owe on the IRA distribution. However, if you use the money to pay for qualified higher education expenses, you won’t owe the 10% early distribution penalty. This rule applies to all IRAs, including Traditional, Roth, SEP and SIMPLE IRAs. However, it doesn’t apply to distributions from company retirement plans, such as a 401(k) plan.

The higher-education expenses must be for education of the IRA owner, the IRA owner’s spouse, or any child or grandchild. Qualified higher education expenses include tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible higher educational institution. They also include expenses for special needs services for special needs students in connection with their enrollment. If the student is at least a half-time student, room and board are considered qualified higher education expenses too.

Penalty-free IRA distributions must be taken for higher education only; they cannot be taken for primary and secondary education expenses (kindergarten- 12th grade). There is no dollar limit that can be used for higher education as there is for first-time home purchases (which is limited to $10,000 over your lifetime).

 

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