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Saturday, September 24, 2005

IRA's, Computers & College

Distributions from qualified retirement plans and IRAs before age 591/2 generally are hit with a 10% penalty tax under Code Sec. 72(t)(1) . There are a number of exceptions to the penalty including one for distributions from an IRA used to pay for qualified higher education expenses. ( Code Sec. 72(t)(2)(E) ) For this purpose, qualified higher education expenses are expenses for tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution. ( Code Sec. 72(t)(7) , Code Sec. 529(e)(3)(A) )

Is a computer required "equipment" for this purpose? According to the U.S. Tax Court, and although my own children will disagree, a computer is generally not required equipment for a college student these days. Mr. Gorski’s daughter attended Miami University in Ohio, and used IRA funds to buy a computer for her. Mr. Gorski admitted that there was a bank of computers available for student use located in the university's library but he said that there were only four or five computers available for 15,000 students at any time. He further testified that by having her own computer, his daughter would not have to use these library computers and risk walking from the library back to her dorm room late at night. The Tax Court said that while the Gorskis' concern for their daughter's safety was understandable, it and other arguments advanced by them did not prove that the purchase of a computer was required by Miami University, and imposed a 10% early withdrawal penalty on the Gorskis. Gorski, TC Summary Opinion 2005-112.
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