Can You Use a Roth IRA for Educational Expenses?
Roth IRAs are retirement savings accounts that allow owners to access money for higher education expenses. There is no age requirement with Roth IRAs, so anyone who has earned income may contribute and save. Investors consider Roth IRAs not only for personal retirement savings, but also for tax-advantaged college savings programs for minors.
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Education Distributions
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A Roth IRA held for at least five years and until the owner is at least age 59 1/2 are qualified for normal, tax-free distributions. Normal distributions are used for any type of expense, including higher education costs. If distributions are taken before the age and time requirements are reached, they are considered early distributions. Most early distributions are penalized 10 percent by the IRS; however, higher education expenses are an exception.
Defining the Expenses
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The student does not need to be the Roth IRA owner. Education expenses are exempt from penalty if the student is the Roth owner or is the child, spouse or grandchild of the Roth owner. Higher education expenses include tuition, books, fees and some living expenses. The college or university must be an accredited school for the exception to be accepted by the IRS.
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Taking the Distribution
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If the distribution from the Roth IRA is a normal distribution, there is no possibility of a tax liability, because all normal distributions are tax-free. This means a qualified grandparent can take unlimited funds out of the Roth for grandchildren. A Roth IRA owner who isn't eligible for normal distributions still can withdraw all contributions -- but not earnings on those contributions -- without paying taxes or penalties. Once all contributions are removed, the earnings are added to adjusted gross income for tax purposes. However, the penalties are waived if the funds are used for education.
Recording Distributions
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Normal distributions for education expenses require no tax reporting. Early distributions utilizing the higher education exception are reported. A 1099-R is sent to the IRA owner. Box 7 of the 1099-R needs number "2," "3" or "4" for the exception to properly be recorded. The Roth owner lists the income on line 15 of personal tax return Form 1040 and also files Form 5329 to record the education exception. The owner is not required to provide receipts for the education expenses, but he should save them in case there is an audit.
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