Careful planning for future education expenses is becoming more common as the national average for college tuition costs continue to rise. Many savers are already familiar with tax-advantaged vehicles such as the 529 Plan or Coverdell Savings Account, but did you know that all IRA account structures offer certain incentives for educational expenses as well? This article explores IRS Publication 970 and the exception to additional tax on early IRA distributions for qualified education expenses.
When it comes to taking IRA distributions an additional 10% penalty is imposed for withdrawing funds before the designated retirement age of 59 ½. This additional tax applies to the Traditional IRA account structure but also includes SEP IRAs, SIMPLE IRAs, and Roth IRAs. Note that early distribution penalties may be as high as 25% for SIMPLE IRAs.
If you decide to withdraw from an IRA to pay for higher education expenses for either yourself or others, you may be able to avoid the 10% penalty that would normally be imposed. Let’s take a closer look at the eligibility requirements below.
Be sure to review IRS Publication 970 for additional details, considerations, and examples. The information provided in this article is for educational purposes only and is not guaranteed to be reliable. Always see a qualified tax professional who can offer advice and guidance. New Direction Trust Company does not offer tax, legal, or investment advice, but we're happy to assist with any questions you may have about self-directed investing when able. Give us a call at 877-742-1270 or send us an e-mail at firstname.lastname@example.org.