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George Saenz, the Bankrate.com Tax Talk columnistWithdrawing IRA cash for education expenses

Dear Tax Talk,
I have a question. Let's say you take money out of a rollover IRA (former 401(k) money) to help defray college expenses for a dependent. What kind of proof would you need to avoid paying the 10 percent penalty that would satisfy the IRS that the money was used for college expenses? Would you need to furnish that proof somehow? Thanks for your help!
-- Sandra

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Dear Sandra,
If you take money from your IRA before reaching the age of 59½, you must include the withdrawal in income. You can be subject to an additional tax of 10 percent for early withdrawal unless it is for an accepted purpose. If you are less than age 59½, and if you paid expenses for higher education during the year, part (or all) of any distribution may not be subject to the 10 percent additional tax. It doesn't matter if you used the IRA funds directly or indirectly to pay the expenditures. For example, you can pay education expenses from wages, loans or gifted funds and later take a distribution to replace those resources.

Qualified higher education expenses include tuition, fees, books, supplies and equipment required for the enrollment or attendance of a student at an eligible educational institution. In addition, if the individual is at least a half-time student, room and board expenses are considered qualified higher education expenses. (This differs from the treatment for education credits and deductions, as room and board expenses are excluded from eligible expenses in that category.) The education must be for you, your spouse or the children or grandchildren of you or your spouse.

You rarely are required to submit proof of any deductions with a tax return. However, you need to keep sufficient documentation to substantiate deductions and exclusions on your tax return. Obviously, keeping track of tuition and books is easy from the receipts or statements from the institution (such as a 1098-T). But getting your kid to keep copies of his meal receipts will probably drive him crazy and consequently he'll hate you for this, and blame you for everything that goes wrong. I hope you'll get a kind revenue agent who will understand your kids and give you a break on some sort of per-diem basis.

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Bankrate.com's corrections policy -- Posted: March 23, 2006
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