I'm considering a withdrawal of my Roth to use for my son’s education, understanding I can only withdraw my contribution without triggering the 10 percent penalty. I just read somewhere that if I do, I will not be able to claim the American Opportunity and/or Lifetime Learning credit. Is this correct?
Qualified Roth IRA distributions may be excludable from taxable income if you meet a five-year holding period. For example, if you first contributed to the Roth IRA in calendar year 2013, a distribution after Dec. 31, 2017, would be considered qualified and excludable from income and not subject to the 10 percent early distribution tax. If the five-year holding period is not met, it cannot be treated as a qualified distribution.
Qualified educational expenses eligible for either the American Opportunity or Lifetime Learning credit must be first reduced by any tax-free educational assistance. Therefore, if a qualified Roth IRA distribution is used to pay an education expense such as tuition, meaning that it is excluded from income, it becomes in effect “tax-free educational assistance” that would reduce the amount of educational expense eligible for education-related tax credits.
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Answered by: Ibolya Balog, CPA, is an associate professor at Cedar Crest College in Allentown, Pa.