Dear Tax Talk,
I withdrew $40,000 from my SEP IRA due to being unemployed. I want to spend $10,000 on going to a tech school to get certifications and increase my chances to find work. I do not plan on getting financial aid next year. The IRS rules state an accredited institution can reduce the 10 percent (early withdrawal) penalty, but the school does not know if it is an accredited institution and refers me back to the IRS rules. How do I find out if it is an accredited institution? It is here in the United States; they do not offer financial aid, Pell grants and such.

Thank you for your time and advice.
— Dale

Dear Dale,
You were fortunate to have had a business that allowed you to create the SEP, or Simplified Employee Pension, IRA. Now, it’s a shame that you’re giving away a good chunk to the government. With a little creativity, there may have been a better way to structure the withdrawal. While you’re asking about some relief on the 10 percent early withdrawal penalty, you’ll still end up paying federal and state income taxes. You’re hoping to save a grand while you’re looking at giving away 10 times that in taxes and penalty. If you had converted your SEP into an appropriate retirement plan established under your business (the business that allowed you to create the SEP) you could have borrowed up to half of the balance tax-free. You can’t borrow or pledge a SEP IRA, but you can with a profit-sharing plan. And you can move that IRA to a qualified plan very simply.

From the IRS website:

Can an IRA be rolled over into a qualified retirement plan (e.g., 401(k), profit-sharing, etc.)?
An IRA can be rolled over into a qualified retirement plan, assuming the qualified retirement plan has language permitting such rollovers.

IRS Publication 560 explains the types of retirement plans available to small businesses. If you’re still within the 60-day rollover window, I suggest you seek professional advice from a CPA. With a few dollars of costs, you may get good advice on how to keep more of your money.

While I hope you can get a better result as well as a good vocation, don’t count on relief from the 10 percent penalty for your educational expenses. For most of the available education benefits, the school has to be accredited. The fact that the school can’t tell you if it is accredited may be an indication that it’s not. An accredited educational institution is any college, university, vocational school or other postsecondary educational institution eligible to participate in a federal student aid program administered by the U.S. Department of Education.

Publication 970 discusses the tax benefits of higher education. After reviewing it, you may want to reconsider your choice of schools.

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