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Individual Retirement Arrangements (IRAs) 

It is fairly common knowledge among investors that the primary purpose of an IRA Account (IRA, traditional IRA, Roth IRA, SEP-IRA, or SIMPLE IRA) is to save money for retirement in a tax-deferred or tax-free environment, depending on the type of IRA.  As a default, the IRA regulations require a ten percent penalty applied to withdrawals, which are made prior to the owner reaching the age of 59 ½ years.  However, there are special rules relating to education.

IRA Penalty Exclusion 

The IRS has provided exclusion to the ten percent penalty, for the purposes of higher education.  These expenses pertain to the education of the IRA accounts owner, the owner’s spouse, the owner’s children or grandchildren, or the spouse’s children or grandchildren.

Tax on Distribution 

A portion of the early withdrawal may still have income tax owed on it, according to regular IRA guidelines.

Qualified Expenses 

IRA account assets can be withdrawn on a federal, tax-free basis, for qualified education expenses.  Qualified education expenses include higher education college tuition, fees, textbooks, supplies, and equipment required, in order to enroll at, or attend, an eligible education institution.  For students who are enrolled at least part-time, reasonable costs of room and board may also qualify, within established IRS guidelines. 

The IRS defines an “eligible educational institution” as any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program, as administered by the U.S. Department of Education. The qualified education expenses may also be reduced, if you are receiving other tax-free benefits.  See the IRS publication 970 for the specific details. 

References

Tax Benefits for Education

(Official IRS Publication 970)

Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)

(Official IRS Publication 560)

Individual Retirement Arrangements (IRAs)

(Official IRS Publication 590)