Back to IRA School: Educational Expense Exception to 10% Penalty (Part 1 of 4)
By Jeffery Levine, IRA Technical Expert
Follow Me on Twitter: @IRAGuru4EdSlott
Can you believe it? We're now 7 full months into 2012 already. And while there's more fun in the sun to be had before summer comes to an end, August has traditionally signaled the start of the back to school season. With that in mind, we thought we'd spend a little time talking about the educational expense exception to the 10% penalty.
What is it?
In general, if you take an IRA distribution penalty prior to reaching age 59 1/2, it will be subject to income tax and a 10% early distribution penalty. However, the Tax Code provides a number of exceptions to the early distribution penalty. If you meet the guidelines for one of these exceptions, you can take a distribution prior to 59 1/2 without incurring a penalty. Ordinary income tax, however, will still apply.
Whose education expenses can be used to qualify for the exception?
Logically, the education exception can be claimed by your own educational expenses. Not surprisingly, it can also be claimed for any expenses incurred on behalf of your spouse or children. Believe it or not, it doesn't stop there. The exception can also be used for educational expenses incurred on behalf of a stepchild, and even a grandchild. What's more? They don't even need to be claimed as a dependent on your tax return.
What types of expenses qualify for the exception?
Tuition is the most obvious expense that comes to mind for most, but the educational expense exception to the 10% penalty can also be used for expenses related to fees charged by an institution, as well as for books and supplies needed for class. In addition, if the student in question is enrolled at least "half-time," then certain room and board expenses can qualify for the exception as well.
Next time, we will answer more specific questions about what items or types of schooling qualify for the exception. Come back next Wednesday for that!
Content Citation Guidelines
Below is the required verbiage that must be added to any re-branded piece from Ed Slott and Company, LLC or IRA Help, LLC. The verbiage must be used any time you take text from a piece and put it onto your own letterhead, within your newsletter, on your website, etc. Verbiage varies based on where you’re taking the content from.
Please be advised that prior to distributing re-branded content, you must send a proof to firstname.lastname@example.org for approval.
For white papers/other outflow pieces:
Copyright © [year of publication], [Ed Slott and Company, LLC or IRA Help, LLC - depending on what it says on the original piece] Reprinted with permission [Ed Slott and Company, LLC or IRA Help, LLC - depending on what it says on the original piece] takes no responsibility for the current accuracy of this information.
Copyright © [year of publication], Ed Slott and Company, LLC Reprinted with permission Ed Slott and Company, LLC takes no responsibility for the current accuracy of this information.
For Slott Report articles:
Copyright © [year of article], Ed Slott and Company, LLC Reprinted from The Slott Report, [insert date of article], with permission. [Insert article URL] Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article.
Please contact Matt Smith at email@example.com or (516) 536-8282 with any questions.