What is a "qualified educational expense"? w/drawing retirement funds

[popmom]

My husband has a small IRA that is not his primary retirement account. We have saved it for use for college expenses as a last resort. Well, after some huge unexpected expenses this year, we are considering making a withdrawal.

 

I keep reading about what the money can be used for (in order to not pay the 10% penalty). Tuition, fees, room and board, books, and supplies. 

 

My girls each receive $8000 a year from a partial scholarship for tuition. I'm assuming we can only count the balance that we have to pay out of our pocket as an educational expense. Is that right? 

 

Also, as far as "room and board"... We paid cash for a condo for our girls to live in while they are in school. We did a cash out refinance on our home to give us the extra funds needed. So we don't pay rent. But our house payment went up $400 a month because of the refi. And we pay $200 a month in COA fees. Would either of those expenses be a "qualified educational expense"? What about groceries? Is that "board"? 

 

The way the rules are worded, it sounds like the student must be living and eating on campus. 

 

Thanks in advance.

[Lori D.]

To avoid tax penalties, absolutely check with a financial advisor or tax accountant who specializes in IRAs and college financial aid to know what exactly you can withdraw from this specific IRA.

 

That said, qualified educational expenses ONLY include tuition, fees, and required books and supplies for attendance at an eligible educational institution. See the IRS information about Qualified Education Expenses.

 

Alas, room and board are NOT qualified expenses, whether living on campus and using a meal plan, or paying rent and buying groceries. Neither are insurance, medical expenses, transportation, or other living expenses.

 

 

You might check with the college's financial aid office as to what exactly the partial scholarship can be used for. If only for tuition, then yes, your only qualified educational expenses would be the remainder of the tuition & fees, and college-required books and supplies. On the other hand, if the scholarship can be used for any college-related expenses, then you could stipulate that the scholarship be used for room & board, and you pay for tuition & fees as a qualified educational expense.

Edited July 2, 2017 by Lori D.

[MarkT]

"

What are qualified education expenses for IRA?
That is because your IRA is intended to be used for your retirement. However, an exception to the penalty allows you to take a penalty-free distribution from your IRA if you use the funds for qualified higher education expenses. Qualified higher education expenses include tuition, fees, books, and supplies.

"

[Crimson Wife]

I used a 529 to pay for my 2nd bachelor's and I could count tuition, required books (had to list it on the syllabus as required rather than just "recommended"), required software/subscriptions (again had to be listed on the syllabus for the course), and the purchase of a laptop that met the technology requirements listed on the program's webpage. If there hadn't been a computer requirement listed but I just wanted one, I would not have been able to use the 529.

[popmom]

Room and board does qualify if you are at least half time. Found this on the IRS website...

 

The expense for room and board qualifies only to the extent that it isn't more than the greater of the following two amounts.

1. The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.

2. The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.

 

https://www.irs.gov/publications/p970/ch09.html

 

So it sounds to me that we might possibly be able to count our groceries and COA dues as long as it doesn't exceed the allowance for room and board as determined by the university--if I'm reading that correctly.

 

I know I can't expect expert legal advice. I was just hoping I might hear from someone who's been in this situation. 

 

Thanks for your input!

Edited July 2, 2017 by stephensgirls

[popmom]

To avoid tax penalties, absolutely check with a financial advisor or tax accountant who specializes in IRAs and college financial aid to know what exactly you can withdraw from this specific IRA.

 

That said, qualified educational expenses ONLY include tuition, fees, and required books and supplies for attendance at an eligible educational institution. See the IRS information about Qualified Education Expenses.

 

Alas, room and board are NOT qualified expenses, whether living on campus and using a meal plan, or paying rent and buying groceries. Neither are insurance, medical expenses, transportation, or other living expenses.

 

 

You might check with the college's financial aid office as to what exactly the partial scholarship can be used for. If only for tuition, then yes, your only qualified educational expenses would be the remainder of the tuition & fees, and college-required books and supplies. On the other hand, if the scholarship can be used for any college-related expenses, then you could stipulate that the scholarship be used for room & board, and you pay for tuition & fees as a qualified educational expense.

 

 

I think the link you shared is for claiming the tax credit--not for avoiding the 10 percent penalty for w/drawing funds from an IRA.

[popmom]

I used a 529 to pay for my 2nd bachelor's and I could count tuition, required books (had to list it on the syllabus as required rather than just "recommended"), required software/subscriptions (again had to be listed on the syllabus for the course), and the purchase of a laptop that met the technology requirements listed on the program's webpage. If there hadn't been a computer requirement listed but I just wanted one, I would not have been able to use the 529.

 

Good to know. We have to buy one of my girls a Mac for graphic design. She's also buying art supplies every week. That really adds up. But I'm not sure all those supplies are listed on the syllabus. They are required supplies though.