Will I Get Penalized for Early Withdrawal From IRA for High School Tuition?

Congress created traditional Individual Retirement Accounts as vehicles for tax-sheltered retirement savings. Unless an exception applies, any withdrawal you make prior to age 59 1/2 will be charged the 10 percent early withdrawal penalty. However, you can explore other options for helping your child complete a quality high school education without having to raid your retirement savings.

Rules

The IRS allows penalty-free (but not tax-free) withdrawals under certain circumstances, including for qualified higher education expenses at "eligible institutions." The IRS strictly defines such institutions as post secondary, so an IRA withdrawal to pay for high school tuition would not qualify for the exception. If you have already taken money out of your IRA, you get 60 days to pay it back without penalty.

Tax Consequences

If you decide to withdraw funds from your traditional IRA anyway, bear in mind that the IRS will tax the withdrawal as income. For example, if your adjusted gross income currently puts you into the 28 percent tax bracket and you withdraw $5,000 from your traditional IRA, the IRS will tax the additional income at 28 percent, and at a higher rate if the withdrawal bumps you into a higher tax bracket. Meanwhile, you will still owe an additional $500 for the 10 percent early withdrawal penalty. If you have a Roth IRA, only the earnings portion of your withdrawal will be taxed and penalized.

Education Savings Account

Consider tapping a Coverdell Education Savings Account (ESA) instead of your IRA. Congress created ESAs as college-savings vehicles, but you can take tax-free distributions to cover high school tuition costs until 2012, after which the provision allowing the use of funds for elementary and secondary education costs expires. If you don't have an ESA for your child, check to see if a parent or other relative established one.

529 Plan

Consider accessing funds from a 529 Plan. Taxpayers must fund 529 Plans with after-tax dollars, and you can withdraw your contributions at any time, tax-free. You'll pay taxes if you withdraw earnings, and you'll also pay a penalty for any withdrawal from a 529 Plan not used for qualified college expenses. Check with your plan's custodian or your tax adviser for the specific penalty in your state.

Other Options

If you are unable to afford private high school tuition for your child this year, get creative. Check with the school about financial aid, scholarships, vouchers or work programs, and find out if there are organizations that provide scholarships for the type of school your child attends. As another option is to find out if your school has an Independent Study Program (ISP) or Private Satellite Program (PSP) that would allow your student to study from home while still having access to school activities.

References

• IRS Publication 590: Early Distributions
• IRS Publication 590: Are Distributions Taxable?
• IRA Web Advisor: Coverdell Education Savings Account Rules Remain the Same Through 2012
• IRS Publication 970: Qualified Education Expenses
• IRS Publication 970: Are Distributions Taxable?
• The ROMAWAT Academy: What Is A PSP?

Resources

• Education Bug: Funding a Private School Education