Question: Will I be penalized if I withdraw funds from my retirement plan account to pay for college education expenses for my daughter?
Answer: Everyone knows paying for college can be challenging. If you are considering a withdrawal from your retirement plan account to cover higher education costs, there are certain parameters to consider.
Withdrawals taken from a retirement account before age 59 ½ are typically subject to a 10% early distribution penalty. However, withdrawals for qualified higher education expenses are an exception. The 10% penalty exception for qualified education expenses applies to IRAs only (not to 401(k) or 403(b) plans). The distribution will be subject to income taxes (just not the penalty). There are no limits on penalty-free withdrawals for qualified higher education expenses.
Qualified education expenses must be at an ‘eligible educational institution’. Essentially, any accredited public or nonprofit college, university, vocational school or other postsecondary educational institution is an eligible education institution. In addition, the institution doesn’t need to be located within the U.S.
The 10% penalty on the IRA distribution can be avoided only if the higher education costs are for the IRA account owner, his spouse, child or grandchild of either the owner or his spouse. Nieces, nephews, cousins, and siblings do not qualify.
Qualified higher-education expenses include tuition, fees, books, supplies, and equipment required for enrollment or attendance. A student must be considered at least a half time student in order for room and board to qualify as higher education expenses.
As always, if you have any questions or would like to learn more, please contact Steve Shane at firstname.lastname@example.org or .
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Steve Shane provides strategic counseling to clients in need of estate administration, charitable giving and business continuity planning while minimizing estate, gift, and generation-skipping transfer tax exposure. He offers legal guidance to clients on asset protection and the proper disposition of assets in accordance with the client’s objectives, while employing tax planning techniques such as the use of irrevocable trusts, life insurance planning, lifetime gifts and charitable trust. He is also experienced with drafting documents for business planning, the incorporation and application for exemption for Private Foundations and the administration of decedents’ estates.
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