In an earlier article, I discussed some of the ways to avoid the 10% early distribution penalty for certain retirement account withdrawals. A reader had this followup question:
Hello, I was reading your article about using room and board costs as an education expense to reduce the 10% penalty on an early distribution from an IRA – if the student rents an apt not run by or affiliated with the college can these expenses be used as qualifying education costs to reduce the 10% penalty or does the student have to live and eat on campus?
Short answer: Yes, the costs for the off-campus apartment are allowable for this penalty exception.
There is a limitation on these costs. They cannot exceed the “allowance for room and board (…) that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period (…).” (See IRS Publication 970, page 58)
In other words, you should check with your educational institution to determine what is their official “allowance for room and board.” This shouldn’t be too hard to find. For instance, I checked the website at CSU East Bay, where I got my Masters Degree in Taxation, and it took less than a minute to find this page outlining the costs of attendance. (“Costs of attendance” is a good term to use when searching or inquiring with a representative of the school.) At the bottom, they explicitly state the estimated cost of room and board for off-campus housing is $12,414 (at the time I checked). Nearly any school eligible for federal financial aid should be able to provide this number. It goes into the equation that federal aid programs use in determining how much aid students are eligible to receive at a given institution, so institutions may actually be required to provide it. (I’m not 100% sure if they’re required to provide it, but I do know it’s very common.) So in my case, since I’m enrolled at least part-time at the University, I could use up to $12,414 in room/board costs during an academic year to offset any penalties related to an IRA withdrawal. (Of course, I must actually have those costs. If my actual costs are less, I could only take the lower amount.)
Publication 970 makes it clear that off-campus costs are allowed in how they describe the amount eligible for this 10% penalty exception. The second limit on the exception (in addition to the exception I just quoted above), is the “actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.” Clearly, if this exception were limited to only housing costs paid to the university, there would be no need to provide both limits.
So check with the educational institution to find out what their official “allowance” is for room/board, and then you can deduct that amount or the actual costs, whichever is lower. (And do your best to find those grocery/restaurant receipts…the rent will be easy, but you might miss some expenses in the food area. Still a lot better than no exception!)