As the name suggests, Individual Retirement Accounts (IRAs) are supposed to help you save for retirement. However, if you need to pay for college now so that you can get a job for all those years remaining before you retire, you can take money from your IRA to pay for college and you'll likely avoid the penalties.
Roth IRA Distributions
Roth distributions are treated differently than traditional IRA distributions because, with a Roth IRA, you get to take out all of your contributions tax-free at any time, for any reason. Say you've got $11,000 in contributions in your Roth IRA. You can take that $11,000 whenever you want, including paying for college, tax-free and penalty-free. However, if you were to take out more than that, the earnings would be subject to income taxes and the early-withdrawal penalty.
Education Expense Exception
The IRS exempts any IRA distribution used for qualifying higher-education expenses from the early-withdrawal penalty. It only applies to post-secondary schools eligible to participate in U.S. Department of Education Loan Programs, which includes most colleges, including private and for-profit colleges as well as state schools. You can use the IRA to pay for not only your own qualified expenses, but also those of your spouse, children or even grandchildren.
The exception only applies to withdrawals used for qualifying expenses, but these are defined quite broadly. Besides the obvious inclusion of tuition, the penalty's also waived for distributions spent on mandatory fees, books and other supplies. Even room and board counts if the student is enrolled at least half-time. Finally, if the student has special needs, the waiver includes costs paid for special-needs services. However, you have to reduce the costs by non-taxable assistance, like scholarships or grants, that you receive.
Reporting on Taxes
When you spend your distribution on educational expenses, you have to let Uncle Sam know about it when you file your taxes to avoid the early-withdrawal penalty. On Form 5329, which is used to calculate the penalty, write "08" as the exemption code next to line 2 to indicate the exemption is for higher-education costs. Then, on line 2, write the amount of your exemption. If the amount of your qualified expenses exceeds your taxable distribution, you avoid the penalty.
- Creatas/Creatas/Getty Images
- How Is My TSP Taxed After Withdrawal From My Retirement?
- Can I Use My Rollover IRA to Finance My Son's College Education?
- Hardship Reasons to Cash in an IRA
- Rules Governing Withdrawals From IRA Accounts
- Can I Deduct College Tuition on My Taxes When Paid by a Tuition Savings Plan?
- IRA Withdrawal Options