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No matter if you're paying for college, graduate school or vocational school, the cost might force you to tap your Roth individual retirement account. Whether you're going back to college yourself or paying for your spouse or kids, the higher education exception will come in handy if you're not eligible to take qualified distributions.
If you can take a qualified distribution, your entire distribution comes out tax-free no matter whether you're using it for higher education or not. Before you can take qualified withdrawals, you must wait until five years have passed since January 1 of the first year you made a contribution. In addition, you must be either 59 1/2 years old or older or permanently disabled.
Withdrawals of Contributions
If you can't take a qualified distribution, you can still get your contributions out of your Roth IRA without taxes and penalties, since you've already paid taxes on the contributions. For example, say you've put in $40,000 of contributions over the years. You can get that $40,000 out tax-free and penalty-free for any reason, including higher education. However, if you've taken out all of your contributions, any additional distributions -- that is, of the earnings on the account -- count as a taxable income and are hit with the 10 percent early withdrawal penalty unless an exception applies.
Higher Education Expenses
The Internal Revenue Service exempts from the 10 percent penalty the portion of your earnings withdrawal that is spent on qualifying higher education expenses. These can be for yourself, your spouse, your kids or your grandkids. This exception only gets you out of paying the early withdrawal penalty; you're still responsible for paying income taxes on the distribution. In addition, if your earnings withdrawn exceed the amount of qualified higher education expenses, you'll still owe the penalty on the excess. For example, say you have $10,000 in qualified higher education expenses but you withdraw $13,000 of earnings. You'll owe income tax on the entire $13,000 and the early withdrawal penalty on the last $3,000.
Qualified higher education expenses include tuition, required fees, and supplies at any post-secondary school. This applies to expenses at both public and private colleges, universities and trade schools. In addition the exception also apples to room and board costs if the student is enrolled at least half time. Typically, the room and board costs are limited to the amount listed by the school in its estimated cost of attendance. However, if the student lives on campus and pays more, the exception applies to the amount actually paid.
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