Withdrawing IRA for education tax exempt?

[Fergieleung]

What do I need to do when filing for tax to prevent penalty fee if I were to withdraw 401k for education?

[MinhT1]

The exception to the 10% penalty for withdrawals for higher education applies only to withdrawals from an IRA account, and not from a 401(k) account.

Please read this IRS document for more information.

If this applies to you, here are the steps to follow in TurboTax.

1. After you have entered all your forms 1099-R, on the summary page Review your 1099-R Info, click Continue 
2. Follow the interview until you arrive at the page titled Did you use your IRA to pay for any of these expenses?
3. Enter the amount of your education expenses in the box next to Higher education and click Continue
4. Your early withdrawal penalty will be waived.

[dmertz]

Using the funds for qualified education expenses exempts the distribution from an early-distribution penalty, not from income tax, and only applies to distributions from IRAs, not from a 401(k).  If your 401(k) permits you to take an ordinary distribution, you can roll the distribution over to an IRA and then take a distribution from the IRA to avoid the early-distribution penalty.

[LRDominguez]

What if there was a distribution from an IRA account in 2023, but the education expenses were paid in 2024? The income from the IRA were paid in the 2nd week of January for the current spring semester of 2024.

Can the higher education cost be included on the 2023 tax return? In order to avoid the early withdrawal penalty?

[dmertz · Accepted solution]

"What if there was a distribution from an IRA account in 2023, but the education expenses were paid in 2024? The income from the IRA were paid in the 2nd week of January for the current spring semester of 2024."

That would not qualify for the penalty exception.

[bobkat2022]

Hi - I'm using TurboTax Deluxe 2024. I have entered several 1099R's and a portion of my early Roth IRA withdrawal was for qualified education expenses. The software never takes me to the screen that you mention in your post - where I would enter the amount that was for education expenses. When I look at Form 5329, there is nothing listed on Line H (Higher Education Expenses). Why is the software not prompting me for this number? Can I simply enter it directly on Form 5329?  Thanks!

[DanaB27]

You can withdraw contributions you made to your Roth IRA anytime, tax- and penalty-free. Therefore, if you only withdrew your contributions you will not get the  "Did you use your IRA to pay for any of these expenses?" screen.

1. Login to your TurboTax Account 
2. Click on "Search" on the top and type “1099-R” 
3. Click on “Jump to 1099-R” and enter all your 1099-Rs
4. Click "Continue" on the "Review your 1099-R info" screen after you entered all you Form 1099-R
5. Answer "Owned Any Roth IRA for Five Years?" screen
6. Continue through the questions and make sure you enter the net contributions prior to 2024 on the "Enter Prior Year Roth IRA Contributions" screen

@bobkat2022 

[Dangbinh]

I didn’t even get the questions that you listed. I use Premier and after entering 1099R , i was asked if I inherit the IRA , I answered no then it asked me what I did with the money. After answering the questions, there is no question on whether I used it for education. Can you point me to where this section is? Thanks!

[DanaB27]

You only get that question if you click "Continue" after you entered all 1099-Rs. Then you will get the "Did you use your IRA to pay for any of these expenses?" screen but only if your distribution is taxable. If your distribution is nontaxable because you are withdrawing your Roth contribution then you will not get the "Did you use your IRA to pay for any of these expenses?" screen.

Please note, the exception of the 10% penalty for education expenses only apply to IRAs. Please see IRS Exceptions to tax on early distributions for more details.

@Dangbinh 

[bjjenkins03]

Where is the box to check higher education expenses? You have to identify the plan and if you pick qualified retirement plan, the higher education expense box doesn't exist.

[bjjenkins03]

This is for an IRA and that box doesn't exist either since it isn't a Qualified retirement plan.

[Dangbinh]

Thanks for your prompt response Dana. My IRA is taxable (the box is checked). The code was 1 (the box before the taxable checked box). I’m pretty sure I answered the questions as they ate straight forward but I still didn’t get "Did you use your IRA to pay for any of these expenses?"

Thanks!

[bjjenkins03]

I figured it out. When downloading directly from the institution, Turbo Tax automatically put it in the 1099R 40l(k) area so I could not say it was for an IRA to have the higher education box. I had to delete the auto pull and type it all by  hand so I could check the IRA box.  Interesting that the 1099 R form the institution had the box checked but Turbo Tax did not pull it in that way. Tried it several time and then said forget the robot and do it by hand. Now it works!

[bobkat2022]

THANK YOU for this reply! That fixed it for me as well - just had to remove the Uploaded 1099Rs and manually enter them, and then presto I'm able to indicate that they were for Higher Education.

Hey Intuit - please fix this upload process!!! Now I'm wondering how many prior years were uploaded wrong and I didn't think to catch it. I've been withdrawing from Roths for years for Higher Ed expenses. Looks like I'll be amending some prior year returns now - ugh.

[BillM223]

The issue could be caused by the fact that TurboTax does not create the 1099-R data that gets uploaded. So you know the old programming phrase, "garbage in, garbage out".

So I can't say where the issue is here, but it may not lie with TurboTax at all.

And you are correct: all uploaded forms need to be double-checked after being uploaded.