If you own a traditional IRA and are about to incur higher education expenses in the near future, you may be interested in considering how you can use your IRA to help pay those expenses.
Although you can withdraw or use the assets in your traditional IRA at any time, withdrawals before age 59½ are considered early distributions. Generally, if you take an early distribution from your traditional IRA, you must pay a 10 percent Penalty Tax. The 10 percent additional tax applies only to the part of the distribution that you must include in gross income and is in addition to any regular income tax on that amount.
There are, however, several exceptions to the age 59½ rule. Under one such exception, a withdrawal of cash from your traditional IRA before you reach age 59½ is not subject to the 10 percent additional tax to the extent you have qualified higher education expenses for the year. These are expenses for education furnished at an eligible educational institution for you or your spouse, or for your (or your spouse’s) children or grandchildren.
For purposes of this rule, qualified higher education expenses includes:
- equipment required for the student’s enrollment or attendance at an eligible educational institution,
- expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance, and
- room and board if the student is enrolled at least half-time.
The amount of your qualified higher education expenses is not reduced by any qualified higher education expenses that are paid with an individual’s earnings, a loan, a gift, an inheritance given to the student or the individual claiming the credit, or personal savings (including savings from a qualified state tuition program). However, you must reduce the amount of your qualified higher education expenses by any qualified higher education expenses that are paid with a Pell Grant or other tax-free scholarship, a tax-free distribution from a Coverdell education savings account, tax-free employer-provided educational assistance, veterans’ educational assistance, and any other tax-free payment (other than a gift or inheritance) received as educational assistance.
An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution that is described in Section 481 of the Higher Education Act of 1965 (20 U.S.C. 1088) and, therefore, eligible to participate in the student aid programs administered by the Department of Education. This includes virtually all accredited public, nonprofit, and proprietary postsecondary institutions.
Please call me at your convenience if you wish to discuss this or any of the other tax-favored ways of paying education expenses.
Please contact the office of Don Fitch Accountancy at (760)567-3110 or Email Don.Fitch@CPA.com if you have any questions or would like additional information.
DON FITCH, CPA
74478 Highway 111 #3
Palm Desert, CA 92260
Toll Free: (877)CPA-Help or (877)272-4357
P.S. My firm is based upon referrals. Please feel free to refer my firm to anyone you know that is looking for a new CPA and/or tax preparer. Thank you in advance.
(Updated 05142021-1 320-322)