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Back to School: Educational Expense Exception to 10% Penalty (Part 2 of 4)

Can you believe it? We're now 7 full months into 2012 already. And while there's more fun in the sun to be had before summer comes to an end, August has traditionally signaled the start of the back to school season. With that in mind, we thought we'd spend a little time talking about the educational expense exception to the 10% penalty.

We first discussed the basic tenets of the exception, whose expenses and what types of expenses qualify in the first installment of this series. CLICK HERE to read the first article on the educational expense exception to the 10% early IRA distribution penalty.

In this installment, we will answer some more common questions involving a major exception for many individuals.

Is the purchase of a computer a qualified educational expense?

Although nowadays a computer is a must-have for virtually every student, in general, this purchase does not meet the definition of a qualified educational expense. However, if the purchase of a computer is required for a specific class, then the expense would qualify for the exception.

Can the exception be applied to expenses for any school?

No. The exception applies only to expenses incurred for college, university, and vocational schools, as well as costs incurred in connection with other post-secondary institutions eligible to participate in the student aid programs offered by the U.S. Department of Education. Although you should do your research to make sure the particular institution in question will qualify, the rules described above will include nearly every accredited post-secondary institution. Note that expenses incurred for nursery/pre-school, elementary school, junior high and high school would not qualify.

Does the student have to be a certain age?

No. There is no statutory minimum or maximum student age to qualify for this exception. However, in practice, most eligible expenses will be incurred for students 17 and older since that’s the youngest age at which most students enter college and other post-secondary educational facilities. Furthermore, it’s unlikely that the exception would be used in conjunction with educational expenses for someone over 59 ½, since fewer individuals in that age group are students. Plus, if they had any IRA funds of their own, they could take distributions from their own IRA penalty free (there is never a penalty after age 59 ½).

Stay with The Slott Report as we delve into more questions (and our answers) in the third installment of the education expense exception series next Wednesday.

- By Jeff Levine and Jared Trexler


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Thursday's Slott Report Mailbag

Consumers: Send in Your Questions to [email protected]

Can I transfer money from my IRA to my husband's Roth IRA? I am 35, and he is 36.

Thank you!

Gail Clements

No. The only way your IRA funds can be transferred to your husband’s IRA is in a divorce or after your death. Even then, it would have to be transferred to a similar IRA, for example an IRA to IRA or a Roth IRA to another Roth IRA. In this case, you cannot transfer your IRA into your husband’s Roth IRA.