401K or Roth IRA

[LawrenceNtim]

Dear Community,

I have a need to take funds (10K) from my 401K or Roth IRA Investment account to help with Daugter's college tuition fee. I have checked to make sure the $10,000 will not increase my AGI "married filing jointly" and put me a higher tax bracket. I will still stay on the 22% tax bracket.   Now, my questions that I want to get help on is that,

since this is for Higher Education,

I don't have to not have to pay 10% early withdrawal fee, but I do have to worry about paying taxes on the 10K?

Please, can you clarify if this applies to both 401K and also the ROTH IRA account. Is there any tax advantage to taking the withdraw from 401K versus the ROTH IRA  account?

You answer is much appreciated in advance.

Regards, 

Humble TurboTax User 

[Hal_Al · Accepted solution]

Q. For the IRA, I don't have to not have to pay 10% early withdrawal fee, but I do have to worry about paying taxes on the 10K?

A. That is correct, in the case of a traditional IRA.  In the case of a Roth IRA, you may withdraw your contributions, both tax and penalty free.  If you need to dip into the Roth earnings, then the tax would apply, but not the penalty*.

Q. Please, can you clarify if this applies to both 401K and also the ROTH IRA account.?

A. No. Only IRAs are eligible for the education penalty exception.

Q. Is there any tax advantage to taking the withdraw from 401K versus the ROTH IRA  account?

A. No. Just the opposite, the advantage is for taking money from the IRA.

* Roth IRA withdrawal. There is no tax on any portion of a withdrawal, from a Roth IRA, that is attributable to contributions (since contributions were not deductible, that is they were made with "after tax money"). Tax & 10% early withdrawal would only be applicable to earnings and (in some cases) conversions. The first money to come out a Roth is deemed to be from contributions.

You may withdraw any part of your contributions (or conversions) from a Roth IRA at any time without tax or penalty. Remember, this was all after tax money when it went in. It's when you start withdrawing the earnings (prior to the age 59-1/2 rule and/or the 5 year rule) that you start getting into a tax or penalty situation.

You are allowed to withdraw your original contributions (what you put in) without paying tax (for the reason you stated, you have already paid tax on that money). After all your contributions have been withdrawn and you start dipping into the "earnings", they will be taxed if you are under 59-1/2.

[sjlocke]

I've made ROTH withdrawals for qualified expenses.  Is there any special procedure I need to do to tell TT the withdrawals were for education related things?  I already ticked the "premature withdrawal" box at etrade when I did them.

[Hal_Al]

Q.  I've made ROTH withdrawals for qualified educational  expenses.  Is there any special procedure I need to do to tell TT the withdrawals were for education related things?  

A. Yes, sort of.

You will receive a form 1099-R, from the IRA administrator, for the distribution (withdrawal). There will be nothing on the 1099-R about education expenses (having told etrade did nothing). Enter it in TurboTax (TT) at Retirement Plan and Social security income.  The code in box 7 tells TT that it was an early distribution.  

TT will then ask about your previous contributions and previous distributions. . If the distribution amount exceeds your contributions basis, TT will calculate the taxable amount. If any is taxable, TT will ask about penalty exceptions (including education) and prepare form 5329 (if needed) to claim the exception. 

[DoninGA]

@sjlocke After you enter the Form 1099-R that you have received for the distributions from the Roth IRA in 2023 there will be several questions concerning the distribution.  After answering the questions you will be presented with a screen to enter the amount and reason for the distribution that will reduce the early withdrawal penalty.  Higher education will be listed.

[sjlocke]

Thanks for the great explanations!