Early IRA Distribution Penalty – Room & Board?
My question is whether I can take “Room & Board” as an exception to the early IRA withdrawal penalty? And if so, how do I calculate the right number. I know that ‘higher education’ costs are valid as an exception. However, I’m getting lot of mixed messages. Bottom line, my son is staying with us while he goes to college. If he was in a dorm, we would be in a smaller apartment. There’s a cost to having with us like rent, room and board, etc. Can you please advise if I can take this cost as an exception? Thanks very much in advance.
Permalink Submitted by Peter Lingane on Wed, 2012-03-07 20:57
Your suggestion is reasonable. The IRS supported a limited allowance in related circumstances for a student living at home – see Prop. Reg. 1.529-1 – but there does not seem to be any current guidance which is directly on point.
But consider the practical difficulty of identifying the incremental cost of your son’s room and board. What is the evidence, for example, that you would be paying less rent if your son were living in the dorm? You might have downsized but then again you might not have.
Permalink Submitted by Alan Spross on Wed, 2012-03-07 21:32
There is more detail in Pub 970 (p 58) on this than in Pub 590. Pub 970 is supported by Sec 72(t) which in turn refers to 529(e) for qualified room and board expenses.
From the wording copied from applicable Sec 529(e)(3) below, it appears that if the school publishes an allowance, that allowance serves as a maximum limit on the RB costs calculated using other means. But if the school does NOT quote an allowance, there can be no RB costs excepted from the penalty because if the school has NO allowance, the expenses cannot exceed -0-. (A) appears to apply in this particular case where the student resides at home with parents.
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(3) an allowance (as determined by the institution) for room and board costs incurred by the student which—
(A) shall be an allowance determined by the institution for a student without dependents residing at home with parents;
(B) for students without dependents residing in institutionally owned or operated housing, shall be a standard allowance determined by the institution based on the amount normally assessed most of its residents for room and board;
(C) for students who live in housing located on a military base or for which a basic allowance is provided under section 403 (b) of title 37, shall be an allowance based on the expenses reasonably incurred by such students for board but not for room; and
(D) for all other students shall be an allowance based on the expenses reasonably incurred by such students for room and board;
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Now my question is – if the school has no dorms, why would they even publish an allowance?
Permalink Submitted by Arev Breh on Thu, 2012-03-08 12:55
Thanks very much for your insight. Believe or not the college that my son attends does not have dorms. However they have a room and board allocation policy and guideline. They are, however, in the process of building dorms. That’s why I was wondering about the deduction. I’ve decided that it’s a little bit to gray of an issue. I can’t seem to get any answer for certainty from various sources. I’m just going to leave it and not take that deductions because it’s unclear and I don’t want to have to deal with any issues. Thank you for all the information and insight.
Best.
ecu
Permalink Submitted by Alan Spross on Thu, 2012-03-08 16:47
Deduction? The prior discussion only related to the 10% penalty. If the have a room and board allowance, you should be able to have the penalty waived up to that limit.
If you already took the IRA distribution, there are also timing issues relating the date of the distribution to the date range of the expenses.
Permalink Submitted by Anonymous (not verified) on Thu, 2012-03-08 19:30
Alan,
“If the school has no dorms, why would they even publish an allowance?”
Perhaps this has to do with the Financial Aid package for which the student may be eligible. We know it cost some amount of R&B (where ever the student may live) even if the school has no dorms. When this amount is added to the other COA components, it causes a larger total COA and then when the EFC is subtracted, the remainder may be eligible for some type of financial aid. Just an opinion.
Permalink Submitted by Alan Spross on Thu, 2012-03-08 20:04
That might be at least one reason for publishing an “allowance” figure.
But if the school does not provide a figure at all, doing an individual cost projection does not appear to be an option to get the penalty waived.