Can I Use IRA Money for Education?

An Individual Retirement Account, or IRA, is a tax-advantaged savings vehicle designed to help you plan for retirement. While this is the primary purpose of an IRA, there are certain circumstances that allow you to withdraw funds early without incurring a tax penalty. One such example is to pay for higher education expenses. While this is not the only option for paying for college, it may be one to consider if other funds aren't available.

Eligibility

• If you currently have funds in a Traditional or Roth IRA, you may make a withdrawal at any time to pay for qualified education expenses for yourself, your spouse, your children or grandchildren.

Qualified Withdrawals

• Funds withdrawn from an IRA must be used to pay for qualified education expenses in order to avoid the 10 percent withdrawal penalty. According to the Internal Revenue Service, qualified education expenses include tuition, fees, books, room and board, special needs services and/or computer equipment. The funds must be used at a post-secondary school in the United States that is eligible to participate in federal student aid programs. Students must be enrolled at least half-time to qualify for a withdrawal.

Tax Implications

• The potential tax penalty for these types of withdrawals depends on your age, the type of account and how long the account has been open. If you have a Traditional IRA, you will have to pay regular income tax on any funds withdrawn for education expenses. If you have a Roth IRA, you may withdraw your actual contributions at any time without penalty. Withdrawals of the Roth IRA's earnings are subject to regular income tax. If you are over age 59 1/2, any distributions from a Roth IRA are tax-free, regardless of how they're used.

Benefits

• There are several advantages to using an IRA to cover college expenses. Funds held in a traditional IRA are sheltered from the financial need analysis so they won't affect you or your child's ability to qualify for student loans. As the account owner, you retain control of your assets and can determine how they are allocated. If you only withdraw your contributions from a Roth IRA, you can pay for education expenses 100 percent tax free.

Considerations

• It's important to consider your tax situation and the long-term effects before withdrawing your IRA to pay for education expenses. For example, you need to make sure you have cash on hand to cover any potential tax liability associated with an early withdrawal. You should also consider how an early withdrawal will affect your overall retirement savings strategy. If you're taking a sizable withdrawal, this could potentially significantly diminish your retirement savings or even delay your ability to retire.