IRA Early Withdrawal Penalty Related Question

@AsifN before you do ANYTHING, please be sure you understand the Repayment plans available and the PSLF (Public Service Loan Foregiveness Program) from government loans.  I appreciate you stated you don't want him to take the loan. 

The repayment plans may be as little as the lesser of the fully amortizing payment over a 10 year period OR 10% of income (over gov'ts family poverty level calculation).  In the early years post medical school, the 10% of income is the lesser and after residency (and fellowship) those last years are limited by the fully amortizing payment.  it is a great, great deal. 

PSLF which covers public workers and those working for non-profits, and most every hospital is a non-profit.

 Once your child has worked in a hospital or other non-profit situation for 10 years (120 payments), whatever the remaining balance is gets WRITTEN OFF with no tax implications!! 

While the repayment plans are advertized as 20-25 years until the writeoff (and after 2025, the write-off is taxable income!), if the student is eligible for PSLF, it is written off after 10 years and the write-off is NOT taxable income. 

it is FAR CHEAPER than liquidating an IRA.  His debt burden goes away quickly post residency.  (I have experience with this as my child is now a doctor and I figure upwards of half his debt will be written off in 3 more years with no tax implications).  

---

@AsifN wrote:

@VolvoGirlUnderstood. So this year he did work and made way more than that amount while he was waiting for his acceptance. If he turns 25 in November of this year, can he still be claimed as dependent for 2023 when we file taxes next year?

---

Qualified education expenses are not subject to the 10% penalty.  Your child's expenses are qualified whether or not they are your tax dependent.  However, the definition of "qualified education expenses" is different for different tax benefits, so make sure you know the correct definition here.  It is:

Qualified higher education expenses.

Qualified higher education expenses are tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a student at an eligible educational institution. They also include expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance. In addition, if the individual is at least a half-time student, room and board are qualified higher education expenses.

Also note that if your child receives any other tax-free assistance (like a grant, scholarship, fellowship, or certain employee benefits) that reduces the amount that is eligible for the penalty exclusion.  

As to whether or your not your child can be claimed as a dependent on your tax return, if the child is over 23 (that means 24 or more) then they only qualify as your dependent if you provide more than half their support AND they have less than $4400 of taxable income (for 2022) or less than $4700 of taxable income (for 2023).  Claiming your child as a dependent gets you a $500 tax credit and may make you eligible to claim the Lifetime Learning Credit on the tuition you pay.  But whether or not you claim your child as a dependent, you still get the penalty exception.