Your Money. Your Terms – How to Avoid Paying the 10% Penalty on Retirement Savings Withdrawals. The Qualified Education Expenses Exemption

Continuing in our series on exceptions to the 10% withdrawal penalty on retirement savings, we highlight how to take advantage of the exemption for qualified higher education expenses.*

Eligibility

Qualified education expenses can be paid for yourself, your spouse or children (biological, foster or adopted). Expenses may include tuition, fees, books, supplies, etc. Room and board are qualified expenses for those enrolled half-time or greater.

The educational institution may be a college, university, vocational school or other postsecondary institution that participates in a student aid program administered by the US Department of Education.

Taxation

The amount of the distribution that isn’t subject to the 10% penalty must be adjusted by any tax-free educational assistance. This may include:

• Coverdell Education Savings Account
• Scholarships
• Pell Grants
• Veteran’s assistance
• Employer provided educational assistance

If the distribution is equal to or less than the total amount adjusted for expenses, the 10% penalty will not apply.

Tax Reporting

The institution issuing the IRA Distribution should send Form 1099-R showing the taxable amount and what amount is subject to the 10% penalty, if applicable.  Form 5329 should also be filed, if applicable.

*Please note: This exception only applies to IRAs. The exception does not apply to Employer Qualified Retirement Plans.