Premature IRA distribution

[Gail in Virginia]

Client is sending his daughter to William and Mary, an inexpensive (!) little school here in Virginia. He withdrew funds from his IRA to help pay the expenses associated. Of course he is not 59 1/2. If he uses the exception for education expenses on his IRA withdrawal to avoid the penalty on part of the funds, can he still take the American Opportunity Credit for tuition and books he paid for? The IRA withdrawal is greater than the costs of her education that can be deducted, but of course they have hotel bills, and restaurant bills, and dorm fees and meal plans,etc. that he thought would be deductible because they were part of what it cost to get her to the college and keep her there.

Basically, my question boils down to: Is it considered double dipping to use the same tuition expense for the American Opportunity Credit and to avoid the penalty on an early withdrawal from and IRA?

[Pacun]

I don't see a problem with the "double dipping" since he will pay regular Fed taxes on the IRA. I would not include hotel and restaurant bills as part of the education expense (and maybe some others that you mention).

Keep in mind that "little school" might not qualify for the AOC if not post secondary or doesn't participate in the financial aid program from the Department of Education.

[kcjenkins]

Pacun, you missed the 'irony' there. William & Mary is a very prestigious school. Chartered on February 8, 1693, by King William III and Queen Mary II as the second college in the American colonies. It's Law School is the oldest in the country, offering five advanced degrees and boasting the most technologically advanced courtroom in the world. I assure you, it is a qualified school.

You are correct, of course, that it is not double-dipping when the funds used are taxable funds. It's only the penalty that they are avoiding, not the income tax.

[jainen]

>> an inexpensive (!) little school <<

My recent experience is that those private schools are CHEAPER than the state universities. First of all, they have a whole lot more financial aid available--even the government BEOG and PELL grants are calculated higher! Even more important, you can actually get into all the classes you need in the right order, so it doesn't take an extra two years to graduate, And they offer a lifetime of free enrollment to keep current. Most important of all, the Good Ol' Boy system will deliver upscale job offers at or before graduation.

[Hahn1040]

William and Mary is a Virginia state school. My second daughter will graduate in May. First daughter graduated in 2009. This last semester's tuition was just over $6,000. Actually W&M is one of the most expensive of the Virginia schools. But a fraction of what neighbors pay to go to Washington and Lee or George Washington! Plus they have had the tremendous experience of spending four years in Colonial Williamsburg!