PERHAPS YOU have a college bill due, but unfortunately your college savings account has run dry. You do have Traditional IRAs and Roth IRAs. What would happen if you took the college tuition payment from these accounts? Would you owe taxes and penalties?

Marc A. Hebert's Money Sense column sig

Both Traditional and Roth IRAs were established to encourage retirement savings on a tax-efficient basis. They were not created with college savings in mind. Given this purpose, any withdrawals made before age 59½ are subject to federal income taxes and a 10% early withdrawal penalty. If you do this, you may need to file Form 5329 at tax time to report your distribution.

As is often the case, many tax rules have exceptions to them and this is one of them. In some instances, the early withdrawal penalty doesn’t apply even though the withdrawal is made before age 59½. One exception is if you use the funds to pay for qualified higher education expenses at an eligible educational institution. Qualified higher expenses include tuition, room and board for a student enrolled at least half time, fees, books, supplies and equipment required by the school in order to enroll. The qualified education expenses must be for you, your spouse, your children or your grandchildren. The withdrawal needs to occur during the same year in which the expenses are paid.

An eligible educational institution is any college, university, vocational school or other postsecondary educational institution eligible to participate in the student aid programs administered by the U.S. Department of Education. The educational institution should be able to tell the student if it is an eligible one.

An IRA withdrawal that is penalty-free might sound like a good idea, however, this doesn’t mean no federal income taxes. Amounts withdrawn that were not previously taxed are added to your income for the current tax year. Adding this income could push you into a higher tax bracket.

If you have made deductible contributions to a Traditional IRA each year, then the entire withdrawal is taxed. If you made some nondeductible contributions to your Traditional IRA, the tax implications change. Only the part of the withdrawal that represents earnings and deductible contributions is taxed.

For a Roth IRA, the earnings portion of the withdrawal will be subject to tax. As all contributions to Roth IRAs are made with after-tax dollars, your amounts representing contributions are not subject to income tax when withdrawn. If you are over age 59½ and have had the account open for five years you will generally have a tax free withdrawal.

Besides the taxes and potential penalties, the disadvantage of doing a withdrawal is that you are reducing your retirement savings. This is money that could be growing for you to use down the road at retirement. Also, you cannot just put the funds back into your IRA once your cash flow improves. The only way to increase the IRA balance is to make contributions each year in the future. These contributions are subject to annual limits.

You might also consider the impact a withdrawal might have on financial aid. Withdrawal amounts might count as income and affect eligibility for need-based financial aid during the next academic year.

As with all things tax, it is a good practice to speak with your personal tax adviser or financial planner to assess the impact on your taxes that a withdrawal might have. There might also be state income taxes to consider, in addition to the federal tax. Tax surprises are not a positive outcome, so preplanning is important.

Marc A. Hebert, MS, CFP, is a senior member and president of the wealth management and financial planning firm The Harbor Group of Bedford. Email questions to Marc at Your question and his response might appear in a future column.