Distribution Amounts for Roth IRA Educational Expenses

How To Calculate the Amount Not Subject to the Additional 10% Tax

This is important because if your IRA distribution is less than your qualified educational expense, you are not subject to the 10% additional tax. It is simple to calculate the amount of your distribution that is not subject to the 10% additional tax. Start by figuring out what exactly your adjusted qualified educational expenses are. Make the calculation by subtracting any tax-free educational assistance from your total qualified educational expenses. Subtract items like the following:

• Veterans’ educational assistance
• Coverdell education savings account (ESA) the expenses used to calculate the tax-free portion of distributions
• Any employer sponsored educational rebates or assistance
• Pell Grants
• The tax-free part of scholarships and fellowships
• Any miscellaneous tax-free or nontaxable payments (not counting inheritance or counting gifts) received as educational assistance/support

It is important not to reduce the qualified educational expense calculation by amounts paid with funds the student gets in the following manner:

• Gifts or loans
• Payments such as wages or payment for other services
• Student’s inheritance or inheritance from the individual making the withdrawal
• Personal savings withdrawals or withdrawals from QTP Qualified Tuition Program savings

The good news is that if your IRA distribution is less than or equal to your adjusted qualified income expenses then you are not subject to the addition 10% tax.

Sample Case #1, Practice Calculation:
Let’s say Albert age 35 didn’t work for a year and attended school full-time to get an MBA. He paid $5,600.00 of qualified educational expenses from the following sources:

• Educational Assistance provided through an employer (tax-free) $4,900.00
• IRA early distribution $3,300.00

To calculate whether Albert has to pay the additional 10% tax on his IRA distribution, he must first reduce his total qualified educational expenses in the following manner:

• Total Qualified Educational Expense $5,600.00
• Subtract Educational Assistance provided through an employer (tax-free) $4,900.00
• Equals Adjusted Qualified Education Expenses (AQEE) $700.00

Since Albert’s AQEE ($700) is greater than the taxable portion of his IRA distribution, he does not have to pay the 10% additional tax on any part of the distribution. However he must be sure that he reports the $490 taxable earnings in his gross income that is subject to income tax.

Sample Case #2, Practice Calculation:
Using the same scenario as Sample Case #1, Practice Calculation, however, let’s assume that that Albert deducted some of the contributions to his IRA so the taxable part of his early distribution is $1,100.00. This must be included in his income subject to income tax because the taxable part of Albert’s early distribution is greater than his AQEE. So Albert must pay the 10% additional tax on $400.00. This is the taxable part of the distribution (41,100) that is more than his qualified educational expenses ($700.00). He does not have to pay the additional tax on the remaining $700.00 of the taxable distribution.

Next: What are the Non-taxable Distribution Amounts?