Taking IRA money to pay for son's medical school tuition

Forum|Forum|2 years ago
April 27, 2023
2 replies
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I spoke to a finance/tax person and they told me that as long as my wife and I 1) do not exceed the $16k each for 2022, and 2) have the money sent directly to his school, we would not even have to declare these. Which we did. We did not have any withholding done. But now I have received two 1099-R forms from Schwab marked as Simple IRA and when I try to mark them as GIFT, TT says that is not allowed. So do I just not include them on my taxes? Do we owe taxes on this money? It seems I can file a form 709 to avoid the taxes (but it lowers my lifetime exclusion) - am I correct here?

And a follow-up, this year his tuition has increased but I also learned that for 2023 the cap is now $17/per person, which is great but I also need to pay for his medical insurance which is another $4k. Now it seems I can pay both but I definitely need to file a form 709 - is my understanding correct?

Thanks in advance.

Best answer by Hal_Al

Q. We were both over 60 when we withdrew the money. So what code do I use when I enter the 1099R into TT?

A. Code 7, normal distribution, is what Schwab should have put in box 7 of the 1099-R.

Q. I still do not understand then the purpose of 709 and the lifetime exclusion?

A. If you make a gift of more than the annual limit ($16K in 2022), you must file form 709 to notify the IRS of the reduction in your lifetime exclusion.

Q. It seems that is intended for this somehow?

A. No, for two reasons; 1. you didn't exceed the limit and 2. there is an exception for the direct payment of educational expenses for certain relatives.

Hal_Al

Employee

Money for education is exempt from the gift tax. There is no limit. You do not need to file a form 709. Reference: https://www.savingforcollege.com/article/tuition-gift-tax-exclusion

Using money from your IRA for education, is not exempt from income tax. It is, however an exception to the 10% early withdrawal penalty. Reference: https://www.investopedia.com/ask/answers/082515/can-my-ira-be-used-college-tuition.asp

Q. So do I just not include them on my taxes?

A. No. Those 1099-Rs are taxable income. The TurboTax interview will guide you on claiming the penalty exception on form 5329.

Q. Do we owe taxes on this money?

A. Yes

Q. It seems I can file a form 709 to avoid the taxes (but it lowers my lifetime exclusion) - am I correct here?

A. No.

It appears your advisor mixed up the rules or you misunderstood what you were told.

ajahearnAuthor

Thanks, we were both over 60 when we withdrew the money. So what code do I use when I enter the 1099R into TT?

Also I still do not understand then the purpose of 709 and the lifetime exclusion. It seems that is intended for this somehow.