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H&rblock 9. H&rblock   Education Exception to Additional Tax on Early IRA Distributions Table of Contents Introduction Who Is Eligible Figuring the Amount Not Subject to the 10% Tax Reporting Early Distributions Introduction Generally, if you take a distribution from your IRA before you reach age 59½, you must pay a 10% additional tax on the early distribution. H&rblock This applies to any IRA you own, whether it is a traditional IRA (including a SEP-IRA), a Roth IRA, or a SIMPLE IRA. H&rblock The additional tax on an early distribution from a SIMPLE IRA may be as high as 25%. H&rblock See Publication 560, Retirement Plans for Small Business, for information on SEP-IRAs, and Publication 590, for information about all other IRAs. H&rblock However, you can take distributions from your IRAs for qualified higher education expenses without having to pay the 10% additional tax. H&rblock You may owe income tax on at least part of the amount distributed, but you may not have to pay the 10% additional tax. H&rblock Generally, if the taxable part of the distribution is less than or equal to the adjusted qualified education expenses (AQEE), none of the distribution is subject to the additional tax. H&rblock If the taxable part of the distribution is more than the AQEE, only the excess is subject to the additional tax. H&rblock Who Is Eligible You can take a distribution from your IRA before you reach age 59½ and not have to pay the 10% additional tax if, for the year of the distribution, you pay qualified education expenses for: yourself, your spouse, or your or your spouse's child, foster child, adopted child, or descendant of any of them. H&rblock Qualified education expenses. H&rblock   For purposes of the 10% additional tax, these expenses are tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution. H&rblock They also include expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance. H&rblock   In addition, if the student is at least a half-time student, room and board are qualified education expenses. H&rblock   The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts. H&rblock 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. H&rblock The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution. H&rblock You will need to contact the eligible educational institution for qualified room and board costs. H&rblock Eligible educational institution. H&rblock   An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. H&rblock S. H&rblock Department of Education. H&rblock It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. H&rblock The educational institution should be able to tell you if it is an eligible educational institution. H&rblock   Certain educational institutions located outside the United States also participate in the U. H&rblock S. H&rblock Department of Education's Federal Student Aid (FSA) programs. H&rblock Half-time student. H&rblock   A student is enrolled “at least half-time” if he or she is enrolled for at least half the full-time academic work load for the course of study the student is pursuing as determined under the standards of the school where the student is enrolled. H&rblock Figuring the Amount Not Subject to the 10% Tax To determine the amount of your distribution that is not subject to the 10% additional tax, first figure your adjusted qualified education expenses. H&rblock You do this by reducing your total qualified education expenses by any tax-free educational assistance, which includes: Expenses used to figure the tax-free portion of distributions from a Coverdell education savings account (ESA) (see Distributions in chapter 7, Coverdell Education Savings Account), The tax-free part of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. H&rblock Do not reduce the qualified education expenses by amounts paid with funds the student receives as: Payment for services, such as wages, A loan, A gift, An inheritance given to either the student or the individual making the withdrawal, or A withdrawal from personal savings (including savings from a qualified tuition program (QTP)). H&rblock If your IRA distribution is equal to or less than your adjusted qualified education expenses, you are not subject to the 10% additional tax. H&rblock Example 1. H&rblock In 2013, Erin (age 32) took a year off from teaching to attend graduate school full-time. H&rblock She paid $5,800 of qualified education expenses from the following sources. H&rblock   Employer-provided educational assistance  (tax free) $5,000     Early distribution from IRA (includes $500 taxable earnings) 3,200           Before Erin can determine if she must pay the 10% additional tax on her IRA distribution, she must reduce her total qualified education expenses. H&rblock   Total qualified education expenses $5,800     Minus: Tax-free educational assistance −5,000     Equals: Adjusted qualified  education expenses (AQEE) $ 800   Because Erin's AQEE ($800) are more than the taxable portion of her IRA distribution ($500), she does not have to pay the 10% additional tax on any part of this distribution. H&rblock However, she must include the $500 taxable earnings in her gross income subject to income tax. H&rblock Example 2. H&rblock Assume the same facts as in Example 1 , except that Erin deducted some of the contributions to her IRA, so the taxable part of her early distribution is higher by $1,000. H&rblock This must be included in her income subject to income tax. H&rblock The taxable part of Erin's IRA distribution ($1,000) is larger than her $800 AQEE. H&rblock Therefore, she must pay the 10% additional tax on $200, the taxable part of her distribution ($1,000) that is more than her qualified education expenses ($800). H&rblock She does not have to pay the 10% additional tax on the remaining $800 of her taxable distribution. H&rblock Reporting Early Distributions By January 31, 2014, the payer of your IRA distribution should send you Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. H&rblock The information on this form will help you determine how much of your distribution is taxable for income tax purposes and how much is subject to the 10% additional tax. H&rblock If you received an early distribution from your IRA, you must report the taxable earnings on Form 1040, line 15b (Form 1040NR, line 16b). H&rblock Then, if you qualify for an exception for qualified higher education expenses, you must file Form 5329 to show how much, if any, of your early distribution is subject to the 10% additional tax. H&rblock See the Instructions for Form 5329, Part I, for help in completing the form and entering the results on Form 1040 or 1040NR. H&rblock There are many other situations in which Form 5329 is required. H&rblock If, during 2013, you had other distributions from IRAs or qualified retirement plans, or have made excess contributions to certain tax-favored accounts, see the instructions for line 58 (Form 1040) or line 56 (Form 1040NR) to determine if you must file Form 5329. H&rblock Prev  Up  Next   Home   More Online Publications
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Tax Information for Plan Participant/Employee

Saving for Retirement
Benefits of saving now, eligibility and participation, putting money in and taking money out of your retirement account

Changes in Your Life May Affect Retirement Planning
Marriage, kids, divorce, or job changes may affect your retirement planning

When You Retire
Required minimum distributions, annuities and taxes on your retirement benefits

Retirement Plan Beneficiaries
When a participant dies

Site Index – Retirement Plans
Alphabetical index of retirement plan topics

Definitions
Common retirement plan terms

Retirement Plan Videos
The IRS Video portal contains video and audio presentations on a range of retirement plan topics of interest to small businesses, individuals and tax professionals.

Additional Resources for Individuals
Forms, publications and other government websites

Page Last Reviewed or Updated: 11-Mar-2014

The H&rblock

H&rblock Index A Accrued leave payment Disability retirement and, Accrued leave payment. H&rblock Assistance (see Tax help) C Care Dependent care benefits, Dependent Care Benefits Child and dependent care expenses, Child and Dependent Care Credit Compensation for permanent loss or disfigurement, Other Payments Credit for the elderly or the disabled, Credit for the Elderly or the Disabled D Damages, physical injury or sickness, Other Payments Dependent care assistance, Dependent Care Benefits Disability Pensions, Disability Pensions Disability benefits, no-fault car insurance policy, Other Payments Disability pensions, Disability Pensions E Exclusion from income Employer-provided dependent care benefits, Exclusion or deduction. H&rblock F Form W-2 Dependent care benefits, Statement for employee. H&rblock Free tax services, Free help with your tax return. H&rblock H Help (see Tax help) I Impairment-related work expenses Definition, Impairment-related expenses defined. H&rblock Impairment–related work expenses, Impairment-Related Work Expenses Income, Income Compensation for permanent loss or disfigurement, Other Payments Dependent care assistance, Dependent Care Benefits Disability pensions, Disability Pensions Long-term care insurance, Long-Term Care Insurance Military and government disability pensions, Military and Government Disability Pensions No-fault car insurance policy disability benefits, Other Payments Physical injury or sickness damages, Other Payments Social security and railroad retirement benefits, Social Security and Railroad Retirement Benefits Supplemental security income (SSI) payments, Supplemental security income (SSI) payments. H&rblock VA disability benefits, VA disability benefits. H&rblock Welfare fund benefits, Other Payments Workers compensation, Other Payments Itemized deductions, Itemized Deductions Impairment-related work expenses, Impairment-Related Work Expenses Medical expenses, Medical Expenses L Long-term care insurance, Long-Term Care Insurance M Medical expenses, Medical Expenses Military and government disability pensions, Military and Government Disability Pensions N No-fault car insurance policy disability benefits, Other Payments P Pensions Disability pensions, Disability Pensions Physical injury or sickness damages, Other Payments Profit-sharing plan, Retirement and profit-sharing plans. H&rblock Publications (see Tax help) S Social security and railroad retirement benefits, Social Security and Railroad Retirement Benefits Supplemental security income (SSI) payments, Supplemental security income (SSI) payments. H&rblock T Tax credits, Tax Credits Child and dependent care credit, Child and Dependent Care Credit Credit for the elderly or the disabled, Credit for the Elderly or the Disabled Tax help, How To Get Tax Help TTY/TDD information, How To Get Tax Help V VA disability benefits, VA disability benefits. H&rblock W Welfare fund benefits, Other Payments Workers compensation, Other Payments Prev  Up     Home   More Online Publications