Can I Use a Roth IRA for School?
Roth Individual Retirement Accounts are best when used for retirement because you can take distributions without taxes or penalties. However, if you or a qualifying relative needs money for higher education costs, the Internal Revenue Service makes an exemption to the early withdrawal penalty for Roth IRAs. Knowing how distributions and the early withdrawal penalty work can help you figure out if a Roth IRA distribution is best to meet your school cost needs.
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Qualified Useage
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The Internal Revenue Service waives the early withdrawal penalty on earnings taken out of a Roth IRA when the money goes toward paying certain college expenses. These expenses can be for yourself or spouse or for your children or grandchildren. For example, you could take an early distribution from your Roth IRA without paying a penalty if you use it to pay for qualified educational expenses for your grandchild.
Qualified Educational Expenses
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The IRS defines which educational expenses may be covered by early Roth IRA distributions taken without paying a penalty. Only higher education costs, such as colleges, university and trade school costs can be included. These typically include only the tuition and required fees set by the school. Fees do not include books for class that the school permits students to purchase on their own. For example, if a class required you to purchase a book from the school bookstore, that cost would count. However, if you could buy it anywhere you wanted, you could not include that cost. Additionally, only students enrolled at least half-time can include costs for room and board.
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Reporting Your Exemption
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When you take an early distribution from your Roth IRA, your financial institution will mail you a Form 1099-R that shows the taxable amount of the distribution. On Form 5329, report that amount and the amount that you used for qualifying expenses. In addition, report the code 08 to show your exemption is for higher education costs. This will exempt you from the early withdrawal penalty, but you will still have to pay for the income taxes on the distribution.
Considerations
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If you meet the criteria to take a qualified distribution from the Roth IRA, you can do so without penalty or tax. The criteria require that you be 59 1/2 years old and that you have made your first Roth IRA contribution at least five tax years prior. Additionally, you can withdraw contributions made to your Roth IRA at any time for any reason, including school costs, without paying income taxes or penalties. The taxes and penalties only apply to earnings.
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