penalty-free tapping of IRA for college
College Money Guru,
Is it true that you are able to use money from an IRA to pay for
college costs without the penalty or having to repay? If so, is
there a specific way to go about this? Are there forms to fill out,
etc.? Or do you just take out the money? What documentation is needed?
Any other information regarding this area would be extremely helpful.
Thank you for your time and assistance.
Yes, you can avoid the 10-percent tax penalty on early distributions
from an IRA when you are paying qualified higher education expenses
for yourself or for your spouse, child or grandchild. It's not necessary
that the child or grandchild be your dependent. And unlike a 401(k)
loan, you won't have the obligation -- or opportunity -- to repay
The waiver applies to the penalty only and not to
any tax owed on a traditional IRA distribution. (Of course, with
a Roth IRA you can withdraw your regular contributions without tax
or penalty at any time and for any purpose.) The optimal approach
would be to leave any earnings accumulating in the Roth IRA until
after you reach age 59½ and can withdraw them free from tax
It is generally not a good idea to withdraw from an IRA if you
or your child will be applying for federal financial aid in the
following year. All IRA distributions, including taxed and untaxed
portions, must be included in base-year income and will reduce aid
eligibility. You may be much better off taking out an education
loan and repaying the loan after the last financial aid application
To claim the penalty waiver, you must file Form 5329 with your
Form 1040 and indicate the amount of qualifying higher education
expenses incurred during the year. You don't have the use the IRA
dollars directly to pay college expenses. For example, you will
not owe the penalty if you pay $10,000 for qualifying expenses in
January and withdraw $10,000 (or less) from your IRA in September
of the same year. Refer to IRS
Publication 970 for the specific categories of expenses that
qualify for this exception and for the adjustment that must be made
when you claim certain other education tax benefits. Keep documentation
of your expenses so you can prove them to the IRS in the event of
And remember, raiding your IRA for college means it will not be
there for you in retirement. Give some consideration to your other
options for funding college.
To ask a question of the College Money Guru, go to the "Ask
the Experts" page and select "College financing" as the topic.