Using Your IRA to Pay For Higher Education

Tuesday, December 04, 2012

By Joe Cicchinelli, IRA Technical Expert

Follow Me on Twitter: @JoeCiccEdSlott

If you are thinking about going back to school but don’t have the money, you can potentially use your IRA to pay for higher education expenses.

Unfortunately, the distribution from your Traditional IRA will be taxable. You are also depleting your retirement funds for a non-retirement reason, which is not ideal. However, even if you are under age 59 ½, the 10% early distribution penalty that normally applies will be waived if you paid for higher education expenses during the year. In order to have the 10% early distribution penalty waived, you must follow certain rules.

Qualified higher education expenses while you are attending a qualified education institution include include tuition, books, supplies, and required equipment. If you are at least a half-time student, then room and board are also qualified expenses. You can’t include expenses that were paid with funds from Pell Grants, tax-free scholarships, or distributions from a Coverdell Education Savings Account.

An eligible educational institution is any university, college, vocational school, or other post-secondary (i.e., after high school) institution that is eligible to participate in student aid programs of the U.S. Department of Education. Notice that it includes vocational schools as well, so it’s not just limited to college expenses. It includes virtually all accredited public and private post-secondary schools. Your school should be able to tell you if it’s an eligible education institution.

In addition to using your IRA for your own higher education expenses, the rules allow you to use it for the expenses of certain relatives. You can use your IRA for the expenses of your spouse, or the children or grandchildren of you or your spouse. There is no dollar limit on how much of your IRA you can use. Remember though, that while you won’t have to pay IRS a 10% early distribution penalty, the distribution is still taxable.

Article Highlights:

  • Using your IRA for higher education expenses is taxable
  • The 10% early distribution penalty is waived
  • Higher education includes the expenses for you, your spouse, your children, and your grandchildren

 

Receive Ed Slott and Company Articles Straight to Your Inbox!
Enter your email address:

Delivered by FeedBurner

 

Post Views: 4
Posted in: , ,

Content Citation Guidelines

Below is the required verbiage that must be added to any re-branded piece from Ed Slott and Company, LLC or IRA Help, LLC. The verbiage must be used any time you take text from a piece and put it onto your own letterhead, within your newsletter, on your website, etc. Verbiage varies based on where you’re taking the content from.

Please be advised that prior to distributing re-branded content, you must send a proof to [email protected] for approval.

For white papers/other outflow pieces:

Copyright © [year of publication], [Ed Slott and Company, LLC or IRA Help, LLC – depending on what it says on the original piece] Reprinted with permission [Ed Slott and Company, LLC or IRA Help, LLC – depending on what it says on the original piece] takes no responsibility for the current accuracy of this information.

For charts:

Copyright © [year of publication], Ed Slott and Company, LLC Reprinted with permission Ed Slott and Company, LLC takes no responsibility for the current accuracy of this information.

For Slott Report articles:

Copyright © [year of article], Ed Slott and Company, LLC Reprinted from The Slott Report, [insert date of article], with permission. [Insert article URL] Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article.

Please contact Matt Smith at [email protected] or (516) 536-8282 with any questions.