Traditional IRA & Qualified Higher Education Expenses

by Mark Kennan

    A traditional individual retirement account allows you to save money on a tax-deferred basis. Contributions are generally tax-deductible, and while the money remains in the account, you won't pay income taxes on the earnings. However, you must pay income taxes on your distributions. In addition, if you're taking an early withdrawal, you owe an early withdrawal penalty unless an exception applies.

    If you're over 59 1/2, the higher education expenses exception isn't necessary, because the early withdrawal penalties don't apply. However, if you take money out of your traditional IRA before you turn 59 1/2 years old, you owe a 10-percent penalty on top of the income taxes you owe. However, you can avoid the penalty on the portion of your distribution used for qualifying higher education expenses. For example, if you take a distribution of $15,000 but you spend $10,000 of it on qualified higher educational expenses, you only pay the 10 percent early withdrawal penalty on only $5,000.

    Qualifying higher education expenses include tuition and supplies at any post-secondary school that participates in U.S. Department of Education loan programs. This includes just about all trade and vocational schools, colleges and graduate schools. If the student is enrolled at least half-time, you can also count room and board costs. For students living off campus, qualifying room and board costs cannot exceed the amount the school lists in its published costs of attendance. For example, if the school lists $12,000 as the room and board costs and the student spends $20,000 to live in a fancy apartment with a full meal plan, qualifying costs are limited to $12,000. For students living on campus, room and board expenses are limited to the larger of the amount listed by the school in its cost of attendance or the cost charged by the university. For example, if the student lives on campus and the school charges $14,000, despite listing $12,000 as the cost of attendance, the full $14,000 counts.

    You can include the costs you pay for any qualifying student, which includes yourself, your spouse, children and grandchildren. You don't have to claim your children or grandchildren as dependents in the year you pay the expenses to use the exception. The IRS doesn't limit the number of qualifying students or the amount of qualifying expenses per year, so if you have more than one kid in college, you can use all of the qualified expenses for the exception.

    You don't have to mail in a copy of the tuition bill, but you do need to complete some extra paperwork on your taxes to claim the exception. You report the traditional IRA distribution as you would any other IRA distribution, but you also have to fill out IRS Form 5329. Next to line 2, write "08" to communicate that you're using the higher education expenses exception. On line 2, write the amount of your qualifying higher education expenses.

    Photo Credits

    • Creatas/Creatas/Getty Images

    About the Author

    Mark Kennan is a freelance writer specializing in finance-related articles. He has worked as a sports editor for "Ring-Tum Phi" and published articles on a number of online outlets. Kennan holds a Bachelor of Arts in history and politics from Washington and Lee University.

    Zacks Investment Research

    is an A+ Rated BBB

    Accredited Business.