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Many people ask me “can I use my IRA before age 59½ for education purposes and what are the rules for IRA withdrawals? Should I get a loan instead?”

Answer: Generally, an IRA withdrawal before age 59½ incurs a penalty of 10 percent in addition to income tax. For some people this can be as high as 50 percent, so it doesn’t make a lot of sense. There are exceptions to this general rule. For example, exceptions exist to encourage some sort of behavior such as getting a higher education (i.e. going to college).

You can withdraw from your IRA penalty-free to pay qualified higher education expenses not otherwise covered by grants. The expenses can be for yourself, your wife, children or grandchildren.

Qualified expenses for the attendane of a student at an eligible college include:
– Tuition
– Books
– Supplies
– Room and Board (must be at least half time student)

The eligible education institution include colleges, universities, vocational schools and postsecondary educational institution eligible to participate in the student aid programs administer by the Dept. of Education. This includes virtually any accreditied, public, nonprofit, and propriety post secondary institutions. The institution should be able to tell you if it is eligible.

While the penalty is forgiven, income tax is due on the withdrawal. However, since higher-education expenses are tax-favored deductions or credits, part, if not all of the tax on the withdrawal could be offset. Consult a CPA for assistance in proper planning to minimize or eliminate the income tax consequences of the IRA withdrawal.