In general, distributions from most tax-qualified retirement plans and IRAs are subject to an additional 10% penalty tax if the distribution occurs prior to the participant’s attainment of age 59-½. A noteworthy exception, especially in today’s economy where higher education expenses continue to spiral upwards, is the use of IRA funds to pay higher education expenses.

Under current law, the 10% early distribution penalty tax does not apply to IRA distributions that do not exceed the amount of “qualified higher education expenses” for the taxable year of the distribution for the education of the participant, the participant’s spouse, or the children or grandchildren of the participant and/or spouse, at an “eligible educational institution”.

“Qualified higher education expenses” are tuition, fees, books, supplies and equipment required for the enrollment or attendance (and special needs services if applicable), as well as reasonable costs incurred for room and board.

An “eligible educational institution” is a college, university, vocational school or other post-secondary educational institution.

Withdrawing money from your IRA may not be the ideal way to pay these education expenses as you do have to pay regular income tax on the withdrawn funds. Nevertheless, if your liquidity has been temporarily impaired by recent market events, it is a potential source from which payments could be made.