Florida 2-15 Life, Health and Variable Annuity AgentGeneral Knowledge of Life InsuranceMedium
A client is 55 years old and needs to access funds from their Traditional IRA to pay for qualified higher education expenses for their child. What is the tax implication of this withdrawal?
- AThe entire withdrawal is tax-free.
- BThe withdrawal is subject to ordinary income tax but exempt from the 10% early withdrawal penalty.
- CThe withdrawal is subject to both ordinary income tax and the 10% early withdrawal penalty.
- DThe withdrawal is taxed as a capital gain.
Show answer & explanationAnswer & explanation
Correct answer: B. The withdrawal is subject to ordinary income tax but exempt from the 10% early withdrawal penalty.
Withdrawals from a Traditional IRA for qualified higher education expenses are exempt from the 10% early withdrawal penalty, regardless of the account holder's age. However, the withdrawn amount is still subject to ordinary income tax, as contributions to a Traditional IRA are typically made on a pre-tax basis.
Why the other options are wrong
- A. Incorrect; Traditional IRA withdrawals are generally taxable as income.
- C. This is incorrect because qualified higher education expenses are an exception to the early withdrawal penalty.
- D. IRA withdrawals are taxed as ordinary income, not capital gains.
Traditional IRA Higher Ed Withdrawal
Withdrawals from a Traditional IRA used for qualified higher education expenses are exempt from the 10% early withdrawal penalty, but the amounts are still subject to ordinary income tax.
- Exempt from 10% early withdrawal penalty
- Still subject to ordinary income tax
- Applies to qualified higher education expenses
- No age requirement for this exception
Memory trick: Education exception, income tax still applies.