Qualified Versus Non-qualified Distributions

• If you meet the criteria, the IRS imposes no penalties, regardless of how you use it, including college expenses. For traditional IRAs, qualified withdrawals require that you are at least 59-1/2 years old. For Roth IRAs, qualified withdrawals require you be 59-1/2 and the account be at least five tax years old. Any withdrawal that does not meet these criteria is a non-qualified distribution.
  
  

Qualifying Educational Expenses

• A qualifying school can be any post-secondary institution that is eligible for federal government-sponsored financial aid, such as colleges, universities and trade schools. Qualifying educational expenses include the tuition and mandatory fees imposed by the university. If the student is enrolled at least half-time, you can also include room and board expenses in this total. Half-time is defined as the student taking at least 50 percent of the credit hours required to be a full-time student as defined by the school.
  
  

Qualifying Individuals

• The IRS does not restrict the exception for college expenses for an early IRA withdrawal to just the account holder. Instead, you can also take money out to pay for the college expenses of your spouse, child or grandchild. You can include expenses paid with loans in the amount exempt from the penalty. However, you cannot include expenses paid with tax-free scholarships, grants and Coverdell educational savings accounts. For example, if you have $19,000 in expenses, an $11,000 scholarship and a $6,000 loan, you can take out up to $8,000 without penalty.
  
  

Reporting the Exemption

• When you file your income tax return, you must also file Form 5329 if you take a non-qualified distribution from your IRA to pay for college expenses. Next to line 2 of Form 5329, report the code "08" to inform the IRS the exception is for college expenses. On line 2, write the amount of your exemption. As long as the exemption amount is equal to or greater than your withdrawal, you will not owe a penalty.