Early IRA Distributions for Higher Education

Taxpayers may take a hardship withdrawal from an individual retirement account (IRA) to pay for qualified higher education expenses without incurring a 10 percent early distribution tax penalty.

Coordination Restrictions

Taxpayers cannot double dip. Taxpayers cannot use the same expenses to justify both the waiver of the 10 percent tax penalty and another education tax benefit, such as a tax-free distribution from a college savings plan, scholarships, military student aid, tax-free tuition waivers, employer educational assistance, the American Opportunity Tax Credit, the lifetime learning tax credit or the tuition & fees deduction. The coordination restrictions are the same as for the American Opportunity Tax Credit.

Eligibility

Distributions from an IRA before the participant reaches age 59 1/2 are normally subject to a 10 percent early distribution penalty in addition to ordinary income tax. However, if the participant uses the money to pay for qualified higher education expenses, the 10 percent tax penalty will be waived.

Qualified higher education expenses are the same as for 529 college savings plans. They include tuition, fees, books, supplies, equipment and special needs expenses. They also include room and board, if the student is enrolled on at least a half-time basis.

The qualified higher education expenses must be for the education of the taxpayer, the taxpayer’s spouse, or the child or grandchild of the taxpayer or the taxpayer’s spouse at a college or university that is eligible for Title IV federal student aid. Qualified higher education expenses for foster children and adopted children are also eligible.

The penalty waiver for early distributions applies to all individual retirement plans, including traditional IRAs, SEP-IRAs, Roth IRAs and SIMPLE IRAs.

Note that IRAs do not permit plan loans, unlike 401(k) retirement plans. On the other hand, IRAs permit penalty-free early distributions for qualified higher education expenses, while 401(k) plans do not.

Income Phaseouts

There is no income phaseout on the waiver of the 10 percent tax penalty for early distributions from an IRA.

Expiration

The legislation authorizing the waiver of the 10 percent tax penalty does not expire.

References

Publications

Forms

Current Law

Legislative History

  • Tax Reform Act of 1986, (P.L. 99-514, 10/22/1986), added section 26 USC 72(t) to specify the terms of the 10% tax penalty on early distributions from qualified retirement plans
  • Taxpayer Relief Act of 1997, (P.L. 105-34, 8/5/1997), adds penalty-free distributions from individual retirement plans for higher education expenses

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