Can You Withdraw Funds From a Traditional IRA to Pay Your College Tuition?

Context

In most cases, when you remove traditional IRA money prior to the IRS' retirement age of 59 1/2, you must pay a 10 percent tax penalty in addition to any regular income tax due on the withdrawal. From this standpoint, the primary benefit of a traditional IRA does not occur on the back-end; rather, you receive an immediate tax perk because the IRS allows you to deduct traditional IRA contributions, up to an annual limit, from your taxable income.

The IRS taxes all withdrawals you take from your traditional IRA at your regular income tax rate at the time of the withdrawal, regardless of your reason for accessing the money. An additional 10 percent tax penalty applies to most distributions that occur before you turn 59 1/2. The IRS exempts several types of withdrawals from the penalty, however, including withdrawals you use to cover qualified higher education expenses.

The IRS considers tuition, required fees, room and board, books, supplies and other equipment necessary to enroll or study at a higher education institution qualified expenses. Special education services also qualify as eligible expenses. As long as you use the entire amount of the traditional IRA distribution you take to pay for these costs, the IRS spares you the 10 percent tax penalty. When you figure the expenses you paid for, the IRS permits you to include costs you paid for with wages, loans, a gift, an inheritance or a withdrawal from personal savings, but not those covered by a Pell Grant, the tax-free portion of scholarships and fellowships, tax-free proceeds from a Coverdell education savings account or education assistance received from an employer, as a result of veteran status or any other tax-free educational assistance payments.

The IRS allows you to use the education exemption on people other than yourself. You can use the money you withdraw from your traditional IRA to pay for college for your spouse, your children, your grandchildren or your spouse's children or grandchildren. The IRS does not limit the amount of traditional IRA money you can use; it only asks that you pay the penalty on amounts that go beyond what you actually paid in eligible expenses.