It’s important to know that the amount of your IRA withdrawal cannot exceed the amount of your qualifying expenses. Both traditional and Roth IRAs allow you to withdraw money for qualified higher education expenses before age 59.5 without incurring the 10 percent early withdrawal penalty. Roth IRAs and Traditional IRAs Follow Different GuidelinesĪ traditional IRA is funded by pre-tax dollars, while a Roth IRA is funded by post-tax dollars. With these funds, you can pay for books, tuition and other qualifying higher education expenses as long as the student is enrolled more than half-time at an eligible institution, as defined by the Department of Education. To be eligible to use this IRA distribution for higher education, expenses must be for yourself, your spouse, your child or your grandchild. Do note that when using an IRA to cover an education expense, you’ll still pay income tax on the portion of the distribution that would otherwise have been subject to income tax. The exceptions? A down payment on a first home or higher education expenses - both are exempt from the 10 percent early IRA distribution penalty. This is in addition to any regular income tax due. Typically, IRA withdrawals before age 59.5 result in a 10 percent early distribution penalty. The Distribution Must Be Used for Qualifying Expenses If you’re considering using an IRA to cover higher education expenses, here are five IRA withdrawal rules you need to know. Taxes will need to be filed following an IRA withdrawal.Withdrawing from an IRA could impact financial aid.A 401(k) can be rolled into an IRA for education expenses.Withdrawals on the principal of a Roth IRA held for at least five years are tax-free if the earnings aren’t withdrawn.No penalty will be incurred if you use your IRA for qualifying expenses - a down payment on a home or higher education for yourself, spouse, child or grandchild.If you’re facing hefty tuition bills and have concerns about managing student loan debt, you’re generally able to take a taxable distribution - penalty-free - from your IRA before you reach the age 59.5, so long as you use the funds for specific higher education expenses. With the rising cost of college, parents and prospective students are turning to retirement funds, such as individual retirement accounts (IRAs), to help pay for school. Saving for both retirement and your child’s college expenses can be a challenge.
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