Skip to main content

Site Navigation

Site Search

global Tax

Can You Use an IRA to Pay for College?

April 02, 2024

Did you know that money in an individual retirement account (IRA) can be withdrawn early without penalty to pay for tuition and other education expenses for you, your spouse, children or grandchildren? Let’s dive in.

Looking for alternative funding options for higher education expenses for you or a loved one? Using your IRA is an option. Here are some considerations to take into account if interested in using an IRA to pay for school.

Refresher: Traditional vs. Roth IRA

An individual retirement account, or IRA, is a tax-deferred retirement savings account. In a Traditional IRA, there is no taxation on contributions. Rather, you pay income tax when taking withdrawals. Traditional IRA contributions may be deductible or non-deductible, depending on your income, tax-filing status and whether you have access to a retirement plan where you are employed (regardless if you participate in the plan or not).

A Roth IRA is a special individual retirement account that you fund with post-tax dollars. In other words, you are satisfying the tax liability upfront, enabling the earnings to appreciate and be withdrawn tax-free. However, you cannot also deduct Roth IRA contributions on your Form 1040, as this would duplicate the benefit. Earnings on the account and withdrawals after age 59½ are accessible income tax-free as long as the account has been in existence for five years.

What are the rules for using an IRA to pay for college?

Typically, if you withdraw from your IRA before age 59 ½, you are assessed a 10% early-distribution penalty tax. There is an exception when the funds are used to pay for higher education.

You are able to use your IRA (including SEP and SIMPLE) for qualifying higher education expenses for yourself, your spouse, child, or grandchild.

Qualifying expenses include:

  • Tuition
  • Fees
  • Room & board
  • Books
  • Supplies
  • Required equipment
  • Computers and internet access

Note that only post-secondary, higher education costs are considered, not K-12 expenses.

What is the dollar limit?

There is no dollar limit on how much you can withdraw from your IRA for educational costs, however, the distribution cannot exceed the education expense amount paid in the same calendar year.

While you are excused from the 10% penalty, keep in mind that the distribution is typically still includable in federal and state taxable income if from a Traditional IRA.

Want to review the best source of funding for college costs? Reach out to us.

Stay informed. Get all the latest news delivered straight to your inbox.

Also in Tax Blog

up arrow Scroll to Top