You can take out as much as you need to pay your child s college costs, including reasonable room and board, tax-free. If you take out more than your child s college costs, your child will owe tax on whatever portion of the IRA s earnings equal the percentage of the withdrawal used for college costs. It makes more sense to tax the percentage of the excess withdrawal you don t use for college than the percentage you do. If the child dies before withdrawing the money, you ll have to distribute the account balance to his or her estate within 30 days of his or her death. This rule was accidentally left out of the law, but should be added in the future.
Education IRAs sound like a great idea but the reality stinks.
That s less than a single year s tuition at the nation s most prestigious colleges. For a better tax-advantaged college savings strategy, consider Section 529 Plans . You qualify if you were 65 years old before the beginning of the tax year or you re retired because of permanent and total disability. To claim the credit, file Schedule R on your Form 1040. If your employer reimburses all your expenses, you don't have to reporting them.