A traditional IRA account is like a regular investment account, but with some added tax benefits. Contributions to the account are generally made on a pre-tax basis, and growth within the account is tax-deferred until the time of withdrawal.
In exchange for the tax benefits of an IRA account, the IRS imposes certain rules that must be followed to avoid penalties. For starters, if you take a withdrawal from an IRA account before you reach the age of 59 1/2, you must pay a 10 percent penalty on the amount withdrawn. Once you reach the age of 70 1/2, you are required to begin taking distributions, and if you fail to do so, you must pay an excise tax of 50 percent of the amount you neglected to withdraw. Additionally, all distributions from a traditional IRA account are fully taxable at ordinary income rates.
If you are under the age of 59 1/2 and you use your IRA withdrawal for higher education expenses, the IRS generally waives the 10 percent penalty. Qualified higher education expenses are defined as books, tuition, fees, supplies, and equipment required for your attendance at an eligible educational institution. Eligible institutions include almost all accredited, public, nonprofit, or private postsecondary institutions. The distribution can be used for you, your spouse, or the children or grandchildren of you or your spouse.
To take your withdrawal, contact your financial services firm and inform them of your intention. You will usually have to complete an IRA withdrawal form, which specifies the amount of the withdrawal, the reason for the withdrawal, and how you want the funds distributed. You can also indicate if you want any tax withheld from the distribution.
Although the 10 percent premature withdrawal penalty may be waived for your higher education expense distribution, you cannot avoid the taxation that is due on all traditional IRA withdrawals. As the contributions to your account were deposited without being taxed, the IRS will tax them now as you use them. At the end of the year, you should receive a Form 1099-R from the financial services firm holding your account which will list your total distribution for the year. Transfer this amount to line 15 of your Form 1040 when you file your taxes.