SECTION 4. USING IRA — Internal Revenue Bulletin 1997-46

WITHDRAWALS TO PAY HIGHER EDUCATION EXPENSES

Beginning January 1, 1998, a taxpayer may make withdrawals from an individ

and board (generally the school’s posted room and board charge, or $2,500 per year for students living off-campus and not at home) if the designated beneficiary is at least a half-time student at an eligible educational institution. The standards for determining whether a student is enrolled at least half-time are the same as those used for the Hope Scholarship Credit. (See Sec. 1, Q&A3.) Q16: What is an eligible educational in stitution? A16: An eligible educational institution

is any college, university, vocational school, or other postsecondary educational institution that is described in section 481 of the Higher Education Act of 1965 (20 U.S.C. 1088) and, therefore, eligible to participate in the student aid programs administered by the Department of Education. This category includes virtually all accredited public, nonprofit, and proprietary postsecondary institutions. (The same eligibility requirements for institutions apply for the Hope Scholarship Credit, the Lifetime Learning Credit, and early withdrawals from IRAs for qualified higher education expenses. (See Sec. 1, Q&A4, Sec. 2, Q&A3, and Sec. 4, Q&A2.)) Q17: What happens if a designated bene ficiary withdraws an amount from an Education IRA but does not have any qualified higher education expenses to pay in the taxable year he/she makes the withdrawal? A17: Generally, if a designated benefi ciary withdraws an amount from an Education IRA and does not have any qualified higher education expenses during the taxable year, a portion of the distribution is taxable. The taxable portion is the portion that represents earnings that have accumulated tax-free in the account. The taxable portion of the distribution is also subject to a 10 percent additional tax unless an exception applies. Q18: Is a distribution from an Education

IRA taxable if the distribution is contributed to another Education IRA?

A18: Any amount distributed from an

Education IRA and rolled over to another Education IRA for the benefit of the same designated beneficiary or certain members of the designated beneficiary’s family is not taxable. An amount is rolled over if it is paid to another Education IRA on a date within 60 days after the date of the distribution. Members of the designated beneficiary’s family include the designated beneficiary’s children and their descendants, stepchildren and their descendants, siblings and their children, parents and grandparents, stepparents, and spouses of all the foregoing. The $500 annual contribution limit to Education IRAs does not apply to these rollover contributions. For example, an older brother who has $2,000 left in his Education IRA after he graduates from college can roll over the full $2,000 balance to an Education IRA for his younger sister who is still in high school without paying any tax on the transfer. Q19: What happens to the assets remain ing in an Education IRA after the designated beneficiary finishes his/her postsecondary education? A19: There are two options. The amount

remaining in the account may be withdrawn for the designated beneficiary. The designated beneficiary will be subject to both income tax and the additional 10 percent tax on the portion of the amount withdrawn that represents earnings if the designated beneficiary does not have any qualified higher education expenses in the same taxable year he/she makes the withdrawal. Alternatively, if the amount in the designated beneficiary’s Education IRA is withdrawn and rolled over (as described in Q&A18 of this section) to another Education IRA for the benefit of a member of the designated beneficiary’s family, the amount rolled over will not be taxable. Q20: Rather than rolling over money

from one Education IRA to another, may the designated beneficiary of the account be changed from one child to another without triggering a tax?

November 17, 1997 14 1997–46 I.R.B.

ual retirement account (IRA) to pay the qualified higher education expenses for the taxpayer, the taxpayer’s spouse, or the child or grandchild of the taxpayer or taxpayer’s spouse at an eligible educational institution. The taxpayer will owe federal income tax on the amount withdrawn, but will not be subject to the 10 percent early withdrawal tax that applies when amounts are withdrawn from an individual retirement account before the account holder reaches age 59 ¹ ⁄2. Q1: When can an individual first make a

withdrawal from an IRA to pay for qualified higher education expenses without paying the 10 percent early withdrawal tax? A1: On or after January 1, 1998, an indi vidual can make withdrawals from his/her IRA to pay for qualified higher education expenses for academic periods beginning on or after January 1, 1998, without paying the 10 percent early withdrawal tax. See Notice 97–53, 1997–40 I.R.B. 6 (October 6, 1997). The 10 percent early withdrawal tax does not apply to a distribution from an IRA to the extent that the amount of the distribution does not exceed the qualified higher education expenses during the taxable year for the taxpayer, the taxpayer’s spouse, and the child or grandchild of the taxpayer or the taxpayer’s spouse at an eligible educational institution. For purposes of this rule, the term “qualified higher education expenses” means tuition, fees, books, supplies, and equipment required for the enrollment or attendance of the student at an eligible educational institution. Qualified higher education expenses also include room and board if the student is enrolled at least half-time. Qualified higher education expenses paid with an individual’s earnings, a loan, a gift, an inheritance given to the student or the individual making the withdrawal, or personal savings (including savings from a qualified state tuition program) are included in determining the amount of the IRA withdrawal which is not subject to the 10 percent early withdrawal tax. Qualified higher education expenses paid with a Pell Grant or other tax-free scholarship, a tax-free distribution from an Education IRA, or tax-free

employer-provided educational assistance are excluded. Q2: What are the requirements for an “el igible educational institution”. A2: An “eligible educational institution”

Year Maximum Deduction

1998 $1,000 1999 $1,500 2000 $2,000 2001 and thereafter $2,500

The deduction is available only for interest payments made during the first 60 months in which interest payments are required on the loan. The student loan interest deduction is available for interest payments due and made on or after January 1, 1998. Thus, the first time taxpayers will be able to claim the deduction is when they file their 1998 tax returns in 1999. No student loan interest deduction will be allowed for interest due or paid before 1998. Q1: Are there any limits on what quali fies as a student loan? A1: Yes. The loan must have been used

to pay the costs of attendance at an eligible educational institution for a student enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential. An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution that is described in section 481 of the Higher Education Act of 1965 (20 U.S.C. 1088) and, therefore, eligible to participate in the student aid programs administered by the Department of Education. This category includes virtually all accredited public, nonprofit, and proprietary postsecondary institutions. For purposes of the student loan interest deduction, eligible educational institutions also include institutions that conduct an internship or residency program leading to a degree or certificate awarded by an institution of higher education, a hospital, or a health care facility that offers postgraduate training. Q2: Is a student loan interest deduction

available if the student loan is not federally guaranteed or otherwise subsidized? A2: Yes. As long as the loan was used to

pay the costs of attendance at an eligible educational institution and the other eligibility requirements are met, the deduction is available for the interest on the loan. The deduc

subject to the 10 percent early withdrawal tax? A3: Generally, if a taxpayer makes a

withdrawal from his/her IRA before reaching age 59 ¹ ⁄2, the taxpayer must pay the 10 percent early withdrawal tax on all or part of the amount withdrawn. Q4: In addition to the Education IRA,

TRA ‘97 also created the Roth IRA. May a taxpayer make a withdrawal from a Roth IRA to pay for his/her child’s qualified higher education expenses without paying the 10 percent early withdrawal tax? A4: Yes. A taxpayer may make a with

drawal from a Roth IRA, as they can from other IRAs, to pay qualified higher education expenses without paying the 10 percent early withdrawal tax.

SECTION. 5. STUDENT LOAN INTEREST DEDUCTION

Beginning January 1, 1998, taxpayers who have taken loans to pay the cost of attending an eligible educational institution for themselves, their spouse, or their dependent generally may deduct interest they pay on these student loans. The maximum deduction each taxpayer is permitted to take increases from $1,000 in 1998 to $2,500 in 2001 and thereafter. The following table summarizes the yearly increases.

1997–46 I.R.B. 15 November 17, 1997

loan and meets the other eligibility requirements, the student may claim the student loan interest deduction for payments made in a later year when the student is no longer a dependent on his/her parent’s Federal income tax return. Q11: Are there any tax benefits available

if the student repays his/her loan by performing community service rather than making cash payments? A11: There may be. Loan forgiveness

provided in return for community service is tax-free when it is part of certain lending programs run by Federal, state, or local governments, educational institutions, or charitable organizations. Students should consult a tax advisor to determine whether they qualify.