Will I be unable to claim the American Opportunity or Lifetime Learning tax credit if I withdraw from my Roth IRA to fund my child’s education?

by Ibolya Balog, CPA | Sep 12, 2018

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.

The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
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