How to Use a Traditional IRA for Education

Individual retirement accounts (IRAs) are tax-advantaged retirement savings accounts that many people use. These accounts allow individuals to save dollars on a pre-tax basis and all distributions from IRAs are subject to ordinary income tax rates. Funds in an IRA cannot be accessed before age 59 1/2 without a 10 percent penalty unless the funds are taken as a qualified hardship withdrawal. Educational expenses are considered a qualified hardship withdrawal.

Things You'll Need

• IRA

Instructions

1. Calculate the room, board, tuition cost, and school expenses for the year. Be sure to account for the cost of books, supplies, and school fees.

2. Contact the custodian institution holding your IRA and request a distribution for the amount you'll need. You can find the custodian's customer service contact information on your statement.

3. Wait for your 1099-R the following tax year. The custodian will send you a 1099-R statement showing that you took a withdrawal from your IRA account. This entire amount will be subject to income tax but not the 10 percent penalty so long as it was all used for educational expenses.

4. File Form 5329. This form is the worksheet the IRS provides for you to calculate the amount of IRA income exempt from the 10 percent penalty.

5. Pay the income tax liability. When you fill out Form 1040 you will still have to pay income tax at your marginal income tax rate on the distribution.

References

• IRS.GOV on using IRAs for educational expenses
• IRS Publication 970 - tax benefits for education, page 58