You can use a Roth IRA for any purpose you want, but unless you meet the criteria for a qualified withdrawal - having the account open for five tax years and being at least 59 1/2 years old - you may have to pay income taxes and an early withdrawal penalty on the distribution. However, the Internal Revenue Service permits a limited exception for college costs.
Early IRA Withdrawal Effects
When you take money from your Roth IRA before attaining the criteria for a qualified withdrawal, you first remove your contributions made to the account. This money comes out tax-free and penalty-free because you used after-tax dollars to contribute to the Roth IRA, no matter how you intend to use the money once you take it out. However, when you run out of contributions to withdraw and start taking out earnings, you must usually count those withdrawals as taxable income and pay a 10 percent early withdrawal penalty.
College Costs Exception
If you use your Roth IRA early withdrawal proceeds to pay for qualified educational expenses for yourself, your spouse, your children or your grandchildren, you can avoid the 10 percent early withdrawal penalty, but you must still report your earnings withdrawn as taxable income. College costs can include tuition, required fees and, if the student enrolls at least half-time, room and board. The IRS defines "half-time" as taking half the number of credit hours as the college considers to be a full-time student.
Limitations
You cannot use the early withdrawal exemption for college expenses paid for by tax-free scholarships or grants, employer-assistance, Pell grants, or other tax-free sources except gifts. However, you can claim the exception for expenses paid for through loans, included subsidized loans. For example, if your son's qualifying costs for the year equal $34,000 but he has a $20,000 scholarship and a $15,000 subsidized loan, you could take out up to $14,000 from your Roth IRA without paying the early withdrawal penalty.
Reporting Roth IRA Withdrawals for College on Taxes
You must file your taxes with Form 1040 if you take an early Roth IRA withdrawal. On line 15a, report the amount of contributions taken out, and on line 15b, report the earnings taken out. If you have any earnings, complete Form 5329 to show your college costs exception from the 10 percent early withdrawal penalty. Write "08" next to line 2 on the form because "08" refers to withdrawals taken for higher education costs. However, these earnings still count as part of your taxable income.
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