by Catherine A. Walsh, CPA, MBT

Although this is not recommended (in a perfect world one would have separate funds earmarked for their own retirement and for their child’s college expenses), if you decide that you will remove funds from your own IRA for your child’s college, knowing the applicable tax rules that cover IRA distributions in these situations may help minimize taxes and or penalties. What you don’t know can hurt you in this situation.

Traditional IRA distributions for expenses of higher education:

Here are the general rules: If the qualified education expenses are incurred in the same tax year as the distribution and those expenses equal or exceed the IRA distribution amount, there is no penalty on the IRA distribution pre age 59 1/2. Virtually all accredited public and non-profit, and proprietary post-secondary institutions are eligible. Qualified expenses include tuition, books, fees, supplies and equipment required for admittance. The cost of providing the student's computer, bedding, etc. are not qualified expenses. Paying-off educational loans does not qualify, neither does making contributions to 529 plans. The distribution must be to pay for education furnished to the participant or his spouse or to any child or grandchild. 

General rules for Roth IRA distributions:

A qualified Roth IRA distribution is one that is not included in gross income for income tax purposes. It is one that is made on or after the Five-Year Period and is made after the participant reaches age 59 ½ or after his death or disability, or in some cases for a first time home purchase. There is not an exception for educational expenses like there is for distributions from a traditional IRA. 

A nonqualified Roth IRA distribution is one that is made before the Five-Year Period is up; or which is made after expiration of the Five-Year Period but not for one of the specified exceptions (age 59 1/2 reached, disability, death, certain purchases of a first home).

Tax consequences of nonqualified distributions:

Basis (what remains of original contributions) are deemed to be distributed first. Then what remains of rollover contributions. These distributions of contributions can be distributed income tax free (and penalty free).

Earnings are deemed to be distributed last. These distributions are taxable and subject to the 10% penalty unless there is an exception (listed above under General Rules for Roth IRA distributions).