It will be up to you to file Form 5329 to claim the exemption.īelow is the required verbiage that must be added to any re-branded piece from Ed Slott and Company, LLC or IRA Help, LLC. Your IRA custodian will issue a Form 1099-R showing an early distribution, but the 1099-R will not reflect an exception to the 10% penalty. In case of an IRS audit, the burden is on you to prove the distribution was for a qualified education expense. It is important for you to retain good documentation of the expenses you paid for with the IRA funds. Finally, expenses paid for with tax-free educational assistance (i.e., with scholarships, Pell grants, Coverdell education account distributions and veterans' educational assistance) are not eligible for the 10% exception. Note that a person must be considered at least a half-time student in order for room and board to qualify. Expenses for computers and related equipment used at school are penalty-free – even if not required by the school. Qualifying expenses include tuition, fees, books, supplies and equipment required by the school. Siblings, nieces, nephews and cousins don’t qualify. To be penalty-free, the expense must be for education of the IRA owner or his spouse, or for any child or grandchild of either. Any accredited post-secondary (post-high school) educational institution – including a foreign institution – qualifies as long as it is eligible to participate in a student aid program administered by the U.S. There are no dollar limits on penalty-free withdrawals however, the distribution can’t exceed the amount of education expenses paid in the same calendar year. If you take an early distribution from your company plan, you’ll be hit with the 10% penalty. Penalty-free withdrawals for higher education are only available from your IRA (including SEP and SIMPLE IRAs). (Remember that, even if you qualify for the exception to the penalty, distributions from traditional IRAs will be taxable.) Here’s what you need to know about the higher education expense exception: 1. Your withdrawal may be subject to a 10% early distribution penalty unless you are able to take advantage of an exception to that penalty. By Ian Berger, JD IRA Analyst Follow Us on Twitter: It’s that time of the year! College bills for the Fall semester are arriving, and you may be thinking of tapping into your retirement savings to help with the costs.
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