Can a SIMPLE IRA Be Used for a Child's College?

Paying college tuition for your child is an exception to the IRA early withdrawal penalty.

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A SIMPLE individual retirement arrangement is a retirement plan offered by small employers or set up by self-employed individuals. SIMPLE IRAs allow tax-deferred savings and follow the same distribution rules as traditional IRAs, including the exceptions to the early withdrawal penalty.

Qualified Withdrawals

If you're at least 59 1/2 years old, you can take qualified distributions from your SIMPLE IRA, so it won't matter if you use it to pay for your child's tuition. Distributions from SIMPLE IRAs count as taxable income; using it for your child's college won't change that.

Early Withdrawal Exception

If you're under 59 1/2, you usually have to pay an extra 10-percent penalty on the distribution on top of the income taxes. But, the portion of your withdrawal that qualifies for the higher education expenses exception avoids the early withdrawal penalty. The exception only applies to the portion of your withdrawal that is used for qualifying education expenses for your child or grandchild or your spouse's child or grandchild. However, the exception does not apply if you're using it for an unrelated person or even a niece or nephew.

Qualified Expenses

The exception only applies to the amount of the distribution used for qualified expenses. These include books, supplies, fees and tuition. Plus, if your child is enrolled at least half-time, it also includes room and board. However, room and board is capped at the amount specified in the college's cost of attendance or, if your child lives on campus and pays more, the actual amount paid.

Tax Filing

You can't assume that the IRS will automatically know why you aren't paying the early withdrawal penalty on your distribution. Instead, in addition to reporting the SIMPLE IRA withdrawal as part of your taxable income, you also must also fill out Form 5329 to tell the IRS why you're exempt from the penalty. Next to Line 2, write the code "08," which tells the IRS that you're paying higher education expenses with the distribution.