Can the amount of tuition/room/board that was paid with loans be withdrawn from an IRA without penalty?
Example:
$15,000 - Qualified education exp after scholarships applied
$5,000 - paid by Federal Student Loan
$10,000 - paid “in cash”
Can I take $15,000 or $10,000 from my IRA without penalty?
Thanks!
Go to page 25 of IRS pub 590-B (“Distributions from IRAs”) and start reading at the paragraph headed “Higher education expenses.”
Yes, a withdrawal may be made from an IRA for the cost of UNREIMBURSED qualified higher education expenses without suffering a 10% penalty. If withdrawn from a “traditional” IRA, the 10% would apply to the entire amount of the dollars ( and their growth) that were made tax-deductible if you are under age 59 1/2, but taxes ( which will beat your tax rate) will be due on that amount. For Roth IRAs, anyone can withdraw for any reason the amount equal to their CONTRIBUTIONS without penalty and without taxes (already paid before).
Qualified education expenses include, tuition, books, fees (but not required “activity fees”) supplies and equipment including computers/software to attend an eligible institution (meaning participates in federal student aid programs). If student attends at least half-time, room and board expenses also qualify.
if you get a Form 1099-R that reports a Code 1 (indicating your IRA withdrawal is subject to penalty) at the end of the tax year, you’ll have to explain and document why the penalty does not apply to you, when you file your taxes.
Thanks for the replies so far. I still don’t see anything specifically addressing loans. I understand what is qualified and I think by unreimbursed they are talking about things like employer reimbursements. I’m thinking we can take the full expenses even though we will not technically pay them out.
Yes, we will have to pay taxes on the money.
We didn’t withdraw from our IRA in 2016, so I forgot ask our tax preparer about it. I’m wondering because we want to take the max we can in 2017.
How old are you? Is there another way to get the funds without dipping into your retirement assets?
If the market has a pullback in the next year or two and you are close to retiring you don’t have a lot of time to “make up” the money you’ve taken out.
It’s on page 25 of the IRS pub that I provided a link for. See the second bullet in the first list in the paragraph that I suggested you read.
Just because you might be able to doesn’t mean it’s wise. You say you didn’t withdraw in 2016. Are you over 59 1/2? No problem. If not, consult a financial planner.
They don’t give loans for retirement if you come up short.
Thank you @BelknapPoint
When I read your response and clicked the link I was using my phone and zoomed into the “qualified higher education expenses” paragraph missing the section right before it with the info I needed.
For those who asked, I’m in my early 40’s.
The amount we are taking from one IRA account will not change our retirement plans. In short, our retirement is well funded. Our college savings is not.
At this particular moment, I am worried that once my D moves out of the dorms and into an apartment, we could (possibly…potentially…maybe) find ourselves needing more $ than our “qualified expenses” because the bulk of tuition is covered by scholarship and her loan. So, I’m considering just taking the $ while we can and holding onto it until we need it. If we don’t need it, we still have it.
Thank you all.
Why can’t you take the money if and when you need it? Apartment room and board is still room and board. It doesn’t have to be a dorm charge.
Why lose the appreciation for two years (if in fact your investments appreciate) if there’s a chance you don’t need the money???
The more non retirement assets you have, the higher EFC