Life and Death Planning for Retirement Benefits

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Chapter 9: Distributions Before Age 59 ½ 421
The distribution does not actually have to be used to pay the education expenses; the
exemption applies to the extent the distribution does not exceed the education expenses incurred
in the same year the distribution occurs. IRS Publication 590 (2009), p. 52. Using the distribution
to repay a loan does not qualify for the exception, even if the loan proceeds were used to pay
education expenses, if the education expenses were not paid in the same year as the distribution.
Lodder-Beckert, T.C. Memo. 2005-162.
The distribution must be to pay for education furnished to the participant or his spouse, or
to any child or grandchild of either of them. This exception borrows definitions from the Code
section allowing various tax breaks to “qualified state tuition programs” (§ 529(e)(3)) for the type
of expenses covered (“tuition, fees, books, supplies, and equipment required for the enrollment or
attendance of a designated beneficiary at an eligible educational institution”) and eligible
institutions. The costs of providing the student’s computer, housewares, appliances, furniture, and
bedding are not qualified expenses. Gorski, T.C. Summ. Op. 2005-112.
“Eligible Institutions” include “virtually all accredited public, non-profit, and proprietary
post-secondary institutions,” according to Notice 97-60, 1997-46 I.R.B. 1, § 4, A-2, which
provides details regarding this exception, including the fact that room and board are among the
covered expenses if the student is enrolled at least half-time.
To the extent the education expenses in question are paid for by a scholarship, federal
education grant, tax-free distribution from an Education IRA , tax-free employer-provided
educational assistance, or other payment that is excludible from gross income (other than gifts,
inheritances, loans, or savings), they cannot also be used to support a penalty-free IRA distribution.
Notice 97-60, § 4, A-1.
9.4.09 IRAs only: First-time home purchase
“Qualified first-time homebuyer distributions” from an IRA are not subject to the penalty.
An individual can withdraw from his IRA (but not from a qualified plan or 403(b)
arrangement!) up to $10,000, without penalty, if the distribution is used “before the close of the
120th day after the day on which such payment or distribution is received to pay qualified
acquisition costs with respect to a principal residence of a first-time homebuyer who is such
individual, the spouse of such individual, or any child, grandchild, or ancestor of such individual
or the individual’s spouse.”
The “date of acquisition” is the date “a binding contract to acquire” the home is entered
into, or “on which construction or reconstruction of such a principal residence is commenced”—
but, if there is a “delay or cancellation of the purchase or construction” and, solely for that reason,
the distribution fails to meet the 120-day test, the distribution can be rolled back into the IRA; this
will be a qualified tax-free rollover, even if it occurs more than 60 days after the distribution, so
long as it occurs within 120 days of the distribution. See A).The rollover back into the
IRA will not count for purposes of the one-rollover-per-year limit D)).
The $10,000 is a lifetime limit. It applies to the person making the withdrawal (the IRA
owner), not the person buying the home. If you withdraw $10,000 in one year to help your son buy
a first home, you cannot later withdraw another $10,000 to buy your own first home.
“Principal residence” has the same meaning as in (exclusion of gain on sale of
principal residence), according to itself does not contain a definition of