Advanced Underwriting Consultants

Ask the Experts – February 26

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: Will my client, the owner of a Roth IRA, age 50, incur income taxes and the 10-percent early distribution penalty if she uses the funds to pay for her child’s college tuition? She has owned the Roth IRA for the requisite 5 years.

Answer: She will incur income taxes on the gain portion of the distribution, but she should avoid the 10-percent penalty.

Roth IRA distributions are excludable from gross income if the owner has reached age 59½, died, become disabled, or if she used the proceeds for a first home purchase. Your client meets none of these qualifications, and so the gain portion of the distribution should be included in her gross income and subject to taxation.

However, even though the gain portion of the distribution is subject to ordinary income taxes, she shouldn’t face the 10-percent penalty. Under Section 72(t)(2)(E), the 10-percent penalty does not apply to distributions from Roth IRAs that are used to pay for qualified higher education expenses, such as college tuition.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.