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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?

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Level 20

Early distribution for education

deleted.
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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)).

https://www.irs.gov/pub/irs-pdf/p970.pdf

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?