By Joe Cicchinelli, IRA Technical Expert
Follow Me on Twitter: @JoeCiccEdSlott
If you are thinking about going back to school but don't have the money, you can potentially use your IRA to pay for higher education expenses.
Unfortunately, the distribution from your Traditional IRA will be taxable. You are also depleting your retirement funds for a non-retirement reason, which is not ideal. However, even if you are under age 59 ½, the 10% early distribution penalty that normally applies will be waived if you paid for higher education expenses during the year. In order to have the 10% early distribution penalty waived, you must follow certain rules.
Qualified higher education expenses while you are attending a qualified education institution include include tuition, books, supplies, and required equipment. If you are at least a half-time student, then room and board are also qualified expenses. You can’t include expenses that were paid with funds from Pell Grants, tax-free scholarships, or distributions from a Coverdell Education Savings Account.
An eligible educational institution is any university, college, vocational school, or other post-secondary (i.e., after high school) institution that is eligible to participate in student aid programs of the U.S. Department of Education. Notice that it includes vocational schools as well, so it’s not just limited to college expenses. It includes virtually all accredited public and private post-secondary schools. Your school should be able to tell you if it’s an eligible education institution.
In addition to using your IRA for your own higher education expenses, the rules allow you to use it for the expenses of certain relatives. You can use your IRA for the expenses of your spouse, or the children or grandchildren of you or your spouse. There is no dollar limit on how much of your IRA you can use. Remember though, that while you won’t have to pay IRS a 10% early distribution penalty, the distribution is still taxable.
- Using your IRA for higher education expenses is taxable
- The 10% early distribution penalty is waived
- Higher education includes the expenses for you, your spouse, your children, and your grandchildren