Is the interest tax exempt I am seeing conflicting statements regarding this. Also removed money from Roth IRA prior to 59 1/2 that was started with nontaxable dollars in 2011 for dependent child tuition expecting to NOT pay 10% penalty but my HR Block tax software doesn’t list dependent Child college tuition as an exception. Please advise
Terry Says: If the bonds are held in the PARENT’s name, and were purchased after 1989, and IF you fall within certain income limits, then you can cash the savings bonds in and use the proceeds tax-free to pay for college tuition. I don’t have the income limits for 2014, but here’s what the Treasury limits were for 2012, the latest posted:
For single taxpayers, the tax exclusion begins to be reduced with a $72,850 modified adjusted gross income and is eliminated for adjusted gross incomes of $87,850 and above. For married taxpayers filing jointly, the tax exclusion begins to be reduced with a $109,250 modified adjusted gross income and is eliminated for adjusted gross incomes of $139,250 and above. Married couples must file jointly to be eligible for the exclusion.
To read all the info about using Savings bonds for college, use this link: http://www.treasurydirect.gov/indiv/planning/plan_education.htm
As for using a Roth IRA for college, you might be getting confused with the rules for withdrawal from a traditional IRA, which do allow penalty-free withdrawals for certain college expenses. But while you can withdraw penalty free from a Roth for a first-time home purchase, you cannot do so for college expenses. There are other ways to get money out of a Roth without penalty. For example, you can always withdraw your CONTRIBUTIONS without penalty (since this is after-tax money). The real problem with taxes and penalties comes in when you withdraw earnings on those contributions. Otherwise, you must wait until age 59-1/2 and have had the money in the account for 5 tax years, (not the same as calendar years), to avoid a penalty on earnings withdrawn from a Roth IRA. (And it gets even more complicated if a Roth conversion was involved, which doesn’t seem to be the case here).
There are a number of different credits and deductions you can get for paying college tuition. I’m working on a column about them that will be posted in the next week, so that might also give you a tax break if you qualify.