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Dear Tax Talk,
I currently have about $45,000 in my Roth IRA. I have put in roughly $15,000 to $20,000 over the last 13 years as contributions. However, I am in a bit of a fix at age 34 — facing unemployment and a lack of education.
So, my question is this: I know there is an exemption of sorts for using early withdrawals toward higher education, but does this also apply to foreign schools? Namely, I am planning on going to Germany to learn the language at an accredited vocational school, earn a certificate of language proficiency and then attend a university toward a Master’s degree program.
I do have a few more questions regarding the specifics though, as this is the American tax system I will have to deal with! Would the definition of “higher education” apply to either of these schools, or neither? Also, the withdrawals are only to be used to pay for tuition, books and lodging — correct? How would they track these as valid expenditures while I am overseas in another country?
Another option I might have is the unemployment clause. I would likely not be working during a large majority of this timeframe because of local visa restrictions and an initial lack of qualified language skills. Could I possibly qualify for the tax exemptions in this case, and again, how would I prove such unemployment from overseas?
If neither case applies to my situation, then how much am I looking at for penalties to withdraw everything (worst-case scenario)?
Any other advice you could provide regarding my situation and the potential early withdrawals would be greatly appreciated. Thank you for your time in reading this.
Furthering your education at this point is a wonderful idea. You will not have to include in your gross income any distributions from your Roth IRA that are a return of your regular contributions to the IRA or any “qualified distributions.” A qualified distribution must meet the following requirements:
- It is made after the five-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit.
- The payment or distribution is made on or after the date you reach age 59 1/2; made because you are disabled; made to a beneficiary or to your estate after your death; or one that meets the requirements for an exception as a first-time homebuyer as defined by the IRS.
You may have to include part of other distributions in your income. IRS Publication 590 Individual Retirement Arrangements has instructions to help you with this calculation.
According to the IRS, qualified education expenses are limited to tuition, books, supplies and equipment needed for a course of study that are required for enrollment at any college, university, vocational school or other post-secondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education. Certain educational institutions that are located outside of the United States also participate in the U.S. Department of Education’s Federal Student Aid Program, so you will need to check with your schools to see that they qualify. If they do not, you may want to consider other foreign schools that do qualify.
You mention an unemployment clause, and I am not certain what you mean by this so I cannot respond to you about it. Additionally, I do not know your personal tax situation, so I am unable to calculate your “worst-case scenario” taxes. However, I hope that I have been able to provide some insight for you. Good luck in your educational endeavors.
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To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.