Rules for Closing a Roth IRA for Education Expenses

by Joe Andrews

There are only a few ways to avoid a 10 percent penalty when withdrawing money from a Roth IRA before age 59 1/2. One of the few methods allowed by the IRS is to use the money for education expenses. However, there are a number of rules you need to follow before closing up your Roth IRA and writing a check to your school with Roth IRA funds.

Qualified Expenses

The IRS only allows withdrawals for tuition, fees, supplies, books and equipment required for attendance or enrollment at an eligible educational institution. As long as the student is enrolled at least half-time, room and board are also considered qualified education expenses. For students living off-campus, the amount withdrawn can't exceed the amount the student would have taken if he'd resided in housing operated by the institution. Qualified institutions include any post-secondary school that is eligible to participate in student aid programs administered by the U.S. Department of Education.

Family Members

The IRS strictly defines who may withdraw funds for education purposes. You may only make withdrawals when under age 59 1/2 for members of your immediate family. This includes you, your spouse, your child, spouses' child, foster or adopted child, or a descendent of any of the above. Withdrawals for any other individuals will trigger the 10 percent penalty.

Taxes

Individuals meeting the above guidelines when tapping a Roth IRA for education expenses won't pay a 10 percent penalty, but gains in the account will be taxed as ordinary income if taken prior to the account holder's age 59 1/2. Contributions can be taken tax free first before interest is taken out, but if the account holder dips into gains he must claim these dollars as taxable income.

Filing Requirements

The financial institution administering your Roth IRA account will send a 1099 detailing the withdrawal of funds. Attach this to your annual tax return by the normal due date. You must fill out Form 5329 and include it with your return. The code exempting you from the 10 percent penalty if you've withdrawn funds for qualified higher education expenses is "08."

Fees

Although the IRS charges no fee to close a Roth IRA for education expenses, your IRA account may. Before deciding whether to remove dollars, call your Roth IRA provider and verify all fees. Specifically, there may be fees both to sell the investment and to close the account. Ask about how long it will take to receive funds from the account after closing the Roth IRA. You may have to fill out paperwork and provide a signature to close the account, slowing the process.

About the Author

As a former financial advisor to companies and individuals for 16 years, Joe Andrews knows financial planning and marketing from start-ups to personal budgets. He also writes on motor racing, board games and travel. Andrews received his B.A. from Michigan State University in English. He is currently working on a young adult novel.

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