IRA Withdrawal Rules for College

What Counts as College?

To prevent the abuse of the early withdrawal exception for college expenses, the IRS defines college expenses as the tuition and fees the college charges. A college is any post-secondary school that can receive federal funds. These include traditional colleges and universities as well as trade schools. The IRS advises that if you have any questions, the school will be able to tell you if it is eligible. If the student enrolls in at least half the number of credit hours to be considered a full-time student, the exception also includes room and board costs.

When you take an early distribution, the IRS typically imposes a 10-percent penalty on the taxable portion of the withdrawal. However, if you use the early withdrawal to pay for college for yourself, your husband or wife, your children or your grandchildren, you can avoid the 10-percent penalty. However, you will still responsible for paying any applicable income taxes on the distribution.

Roth IRA early distributions differ for traditional IRAs in that you can take contributions made to the account out without taxes or penalty at any time, for any reason. Though these early withdrawals of contributions must still get reported on your income taxes, they do not affect your taxable income. However, any earnings you remove from your Roth IRA receive the same treatment as early distributions from traditional IRAs.

Your financial institution mails you a Form 1099-R at the end of the year that shows how much you withdrew from your IRA in box 1. If you have a Roth IRA and withdrew any contributions, that amount will show up in box 2. When you file your taxes, report both the taxable and nontaxable portions. If you have any taxable distributions, file Form 5329 to report your exemption from the early distribution for using the money for college expenses.