Can I Withdraw Funds From My IRA for Educational Expenses?

Only higher education expenses qualify for the IRA early withdrawal penalty exception.

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If you tap your individual retirement account to pay higher education expenses, you might be able to avoid the early withdrawal penalty, depending on which costs you're paying. The Internal Revenue Service does not offer a similar exception if you use the money for grade school or high school expenses.

IRA Types

When you take an early distribution, the tax treatment depends on whether you're withdrawing from a traditional IRA or a Roth IRA. With a traditional IRA, the full amount counts as taxable income, unless you've made nondeductible contributions. If you have, you prorate the distribution and the nondeductible contributions portion comes out tax-free. With a Roth IRA, you take out all your contributions before you touch the earnings. Withdrawals of contributions are tax-free and penalty-free, so as long as you don't take out more than the contributions in the account, you won't owe any taxes or penalties.

Qualified Educational Expenses

If some of your early IRA withdrawal is taxable, you can avoid paying the extra penalty when you use the money for qualified education expenses. These include tuition, fees and course materials at post-secondary schools, such as trade schools, colleges and graduate programs. If the student enrolls at least half time, you can also count room and board. However, qualified expenses don't include any costs paid with tax-free scholarships. For example, if tuition is $10,000 but you use a $6,000 scholarship, only $4,000 goes toward figuring your qualified expenses for the exception.

Paying Expenses for Others

The IRS also allows you to use the exception for qualifying expenses paid for qualifying students besides yourself. You can avoid the early withdrawal penalty on amounts paid for your spouse, your children and grandchildren, and your spouse's children and grandchildren. For example, if you pay $14,000 for your daughter's college tuition, that qualifies for the exception. However, paying the same amount for your niece doesn't qualify.

Tax Reporting

Just because you spent the distribution on qualified expenses doesn't mean the IRS knows about it, so you have to share the news on your tax return. Usually, you use Form 5329 to figure your penalty, but you also use it to note your exception. Next to line 2, the form has a line for you to write in the code for your exception. If you're just using the higher education expenses exception, write "08." If you have multiple exceptions, use code "12" instead.

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About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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