Investors can withdraw from their IRAs without penalty for qualified higher education expenses, including books, tuition, and equipment.
The first thought that comes to almost everyone's mind when they hear "IRA" is long-term. IRAs are thought of solely as retirement investment vehicles, but there are some basic rules and exceptions that apply to IRAs that the common investor might not know.
Early withdrawals from IRAs normally result in undesired penalties. However, a young investor may pull earnings from his IRA without incurring the 10% tax penalty, as long as the funds are used for qualifying higher education expenses.
Education = Qualification
Educational equipment necessary for attendance are considered qualifying expenses.
Not every cost related to college qualifies a penalty-free early withdrawal. There are guidelines.
Tuition, fees, books, supplies and equipment required for enrollment or attendance all qualify as penalty-free withdrawals. Additionally, for those that are at least enrolled as half-time students, room and board also qualify as penalty-free withdrawals.
Traditional IRAs
For students making early withdrawals from a traditional IRA, normal income taxes will still apply. This essentially turns the IRA into a tax-deferring investment vehicle, since contributions to traditional IRAs are tax-deductible.
If the early withdrawals qualify as higher education expenses, there will be no 10% tax penalty assessed, but the earnings will be taxed at the investor's tax bracket level.
This makes traditional IRAs excellent choices for young investors, since the rules give them the option of holding their investments until retirement or redeeming them in favorable tax conditions if they need assistance paying for their higher-level education.
Roth IRAs
There's even better news. Early distributions for qualifying educational expenses from a Roth IRA are penalty- and tax-free. Roth IRAs require contributions to be made with after-tax earned income, so the associated withdrawals cost the investor absolutely nothing.
This makes Roth IRAs ideal for both long-term retirement investments, as well as shorter time horizons such as educational savings.
Tags: education expenses, higher education, higher education expenses, Roth IRAs, early withdrawals