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Level 1

Early distribution for education

Using these numbers for simplicity, If I did an early withdrawal from an IRA for $100,000 as well as a withdrawal from a 529 for $100,000 of which $50,000 was earnings and there were $25,000 of qualifying educational expenses, am I right to assume that it is better to offset the $25,000 expenses from the IRA, rather than the 529 since the IRA offset will be dollar for dollar, but the offset to the 529 will only be a proportion of expenses to distributions times earnings, giving $37,500 in taxable income?

If I choose to offset against the IRA in Turbotax, and then I enter the 1098-T info from the school, won't Turbotax then offset it from the 529 as well in error?

3 Replies
Level 20

Early distribution for education

See answer
Level 20

Early distribution for education

There is no offset of the IRA distribution for tax purposes . The IRA distribution is fully taxable. The educational IRA exception refers only to the 10% early (before age 59.5) distribution penalty.  

However, this is a case where some "double dipping" is allowed. You may claim an exception for the 10% penalty on the $25,000 that was used for education. You can also claim the same $25,000 of educational expenses for the 529 plan exclusion.

From IRS Publication 970 (page 56, the section about the 10% penalty exception):

Don't 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)).

The Turbotax interview will handle each benefit, separately. TurboTax  will ask an exception question, later in the program, at the federal review (not at the retirement income/1099-R section) and fill out form 5329, if needed. If you need to get there sooner, type> Form 5329 <in the search box.

Level 1

Early distribution for education

Thank you!  In the IRA section, Turbotax did ask a question about education exceptions and I left the amount blank.   Should I have filled it in, or are you saying at the final review, Turbotax will take me back there?