IRA question. 40K early distrib; 20K first home;4500 is 7.5%AGI; 6k medical exp; 11K edu exp; how to calculat?

Question

What is confusing to me is the restriction about adjusted qualified edu expense not exceeding early distribution to qualify for exception to10% addl tax rule. Are we to consider the absolute amounts of 40K - total early distrbution amount and 11K edu expense ?

Answer 1

Let me make sure I understand the question. Are you saying you are taking out an early distribution from your IRA of $40,000 and want to shelter all of it from the 10% early distribution penalty? Well, first of all, you only have $10,000 per person per lifetime of 1st time home buyer's exemption. Of course, if there are two of you, each can pull out $10,000 from their own IRAs.

It looks like you are reading Publication 590. Good. The phrase that is confusing to most people is "The part not subject to the tax is generally the amount that is not more than the qualified higher education expenses (defined later) for the year...". What they are saying is that the amount you can exempt for education can not be more than the amount you paid for education. They are not saying you can't include other exemption items on top of the education exemption items.

So, if you paid $11,000 for tuition, fees, books, supplies, and equipment regardless if it was from a loan, a gift, or from your own wallet, but not from a scholarship or grant, and if you paid at least $10,000 for a house, and if your medical expenses exceeded 7.5% of your AGI by $2,000 (regardless if you use a Schedule A), then you can pull out $23,000 from your IRA and not be penalized. Don't forget that even though you avoid the penalty, you will still have to include the amount you pull out as taxable income in the year you pull it out. There is nothing you can do to avoid that.