Tax Penalty Exemption for Higher Education Tuition

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@GradStudent01 wrote:

I am taking a distribution from my Traditional IRA to pay for a graduate program tuition expense. 

Is this exempt from the 10% tax penalty? 

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Yes.

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@GradStudent01 wrote:

Can I take the distribution in 2021 for tuition that is due in 2022? 

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Technically yes, but I wouldn't do that. If the IRS doesn't see tuition expense on your tax return that is at least as much as the IRA distribution, they are likely to question the exception from the penalty. To avoid trouble, I recommend that you take the distribution in the same year that you pay the tuition.

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@GradStudent01 wrote:

Can I use some of the distribution to pay for 2021 education loans without the additional tax penalty?

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Yes.

You could take two separate distributions, one in 2021 to apply to the loan payments you made in 2021, and a separate distribution in 2022 to apply to the tuition that you pay in 2022.

Another option might be to pay the 2022 tuition in 2021. You can claim the Lifetime Learning Credit in 2021 for tuition that you pay for an academic period that begins in the first 3 months of 2022.

You only have a few days left to take a 2021 distribution. The distribution has to be completed and paid out to you by December 31. (Realistically it has to be paid by December 30, since December 31 is a bank holiday this year.) If you initiate a distribution now, talk to the IRA custodian and make sure they will be able to complete it by December 30. It often takes a few days for a distribution to be made.

If you talk to the IRA custodian about taking a 2021 distribution, confirm that they will send you a 2021 Form 1099-R for the distribution. That's essential for reporting it on your 2021 tax return.

Q.  I am taking a distribution from my Traditional IRA to pay for a graduate program tuition expense. 

Is this exempt from the 10% tax penalty? 

A. Yes, but tax is still due.

Q. Can I take the distribution in 2021 for tuition that is due in 2022? 

A.  No. Or more specifically, yes but you must make the payment (for  the 2022 tuition) in 2021. Even that may be iffy.  The general rule is that  the education expense and the IRA distribution must occur in the same calendar year*.  Payments made in 2021 for tuition for the first term of 2022 is a qualified educational expense for most educational tax benefits for tax year 2021. But, I can not  find that  rule specifically  for  IRA distributions.

Q. Can I use some of the distribution to pay for 2021 education loans without the additional tax penalty?

A. Yes. You cannot take IRA funds to pay off student loans after graduation, but you can withdraw  to offset the impact of loan payments while you are in school.**

*Reference: https://www.lordabbett.com/en-us/financial-advisor/insights/retirement-planning/using-an-ira-to-pay-for-college-expenses.html

**Reference: https://www.investopedia.com/ask/answers/082515/can-my-ira-be-used-college-tuition.asp