If someone takes an early distribution from an IRA, can they use the exception to the penalty for higher education expenses if a member of their family, say a grandchild, has qualified education expenses, even though the taxpayer did not give the family member any money? Let's say they used the money for a vacation.
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TTB, page 12-7 says that the IRA withdrawals made to pay qualified education expenses of the taxpayer, spouse, or any child or grandchild qualify for the exception to the 10% penalty. It also says the student does not need to be the taxpayer's dependent.
Note, however, that it says "withdrawals made to pay qualified expenses."
Granny can't just go on vacation with here IRA money because she's got a granddaughter paying her way through college. Granny has to fork over the dough and pay the qualified education costs for her granddaughter in order to exclude the money from the 10% penalty. -
The way some people think
The way some people think, she could avoid the penalty by paying the college expenses, and still go on the cruise courtesy of her granddaughter's gift!Comment
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But.... the payment has to be direct to the school and not to the granddaughter. So where is the granddaughter going to get the money to gift and send grandma on a cruise?Comment
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I was trying to figure the age thing here. Granny is 18 when she has her daughter. She is 36 when her 18 year old daughter has a daughter. Granny is 54 when her 18 year old granddaughter goes to college.
Yeah, I guess that works. I was trying to think why Granny hasn't reached age 59 1/2 yet, where she wouldn't need any other exception from the early withdrawal penalty.Comment
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Originally posted by OldJack
If the granddaughter is already paying her college expenses out of her pocket, then if Granny pays the expenses instead, the granddaughter now doesn't have to pay the expense, and thus has the money to send Granny off to Cancun, sipping margaritas.Comment
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