IRS ISSUES GUIDANCE ON TIMING OF PENALTY-FREE IRA EDUCATION WITHDRAWALS

The Taxpayer Relief Act of 1997 permits owners of IRAs to make withdrawals if the money goes to pay qualified education expenses for the taxpayer, his or her spouse, children, or grandchildren. These withdrawals are not subject to the 10% penalty for early withdrawals. The withdrawals will, of course, be included in income.

IRS recently issued guidance about the effective date of this provision. Penalty-free education withdrawals may first be made for semesters beginning January 1998 or later, but only if the distribution occurs after December 31, 1997.

Qualifying expenses include tuition, fees, books, supplies, and equipment needed for attendance at post-secondary schools. *

Sources: IRS Notice 97-53, 1997-40 I.R.B. __ (Oct. 6, 1997) and IRC section 72(t)(2)(E)
and (t)(7).