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emc011075
emc011075, Tax adviser
Category: Tax
Satisfied Customers: 2573
Experience:  IRS licensed Enrolled Agent and tax instructor
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I have a question im actually researching friend. My friend

Customer Question

HI I have a question im actually researching for a friend. My friend took a "buy out" on a Defined Benefit Plan from former employee. This payout on this plan will be paid in 12/15. My friend want to take the higher education exemption because he is sending is child to college in august of 2016. Although the "buy out " took place in 12/15 Can he excersise the higher education exemption for the august 2016 semester.
Other than making the claim on the tax return is there any special form/document that needs to be filed. and does the PARENT have to show proof it was used directly for college or will the FASFA EFC verify my responsibilty? TY
Submitted: 1 year ago.
Category: Tax
Expert:  emc011075 replied 1 year ago.

HI. My name is ***** ***** I will be happy to help you.

Can you be more specific what you mean with "higher education exemption". Do you mean exemption from early distribution penalty (10%)?

Expert:  emc011075 replied 1 year ago.

Distributions from Defined benefit plan or other employer sponsored plans don't qualify for the exemption. What your friend needs to do is to open IRA (Individual retirement account), do direct trustee to trusty rollover from the defined benefit plan into IRA and when the times comes, your friend can use the funds to pay for the child's college. Here's IRS table with exemptions:

https://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics---Tax-on-Early-Distributions

To do hassle free rollover, your friend needs to make sure that the money are transferred between institutions without him/he receiving check or any distribution.

The rollover will not be included in taxable income in 2015 and when the funds are used to pay college expenses, the distribution will be included in taxable income, however most of it, if not all will be offset by education credits.

Customer: replied 1 year ago.
I know the early deduction is subjected to tax in the same way as normal income. My question relates to the additional 10% tax penalty. Is this 10% exempt under the IRS rules regarding highrer education
Expert:  emc011075 replied 1 year ago.

Can you see my second respond? Only distributions from IRA qualify for the higher education exemption.

Customer: replied 1 year ago.
ok ty
Expert:  emc011075 replied 1 year ago.

You're welcome. Not all retirement plans are treated the same way. Is there anything else I can help you with today?

Expert:  emc011075 replied 1 year ago.

And if this answered your question, please take a moment to rate my response so that I may receive credit for assisting you today. However, if you need clarification, or want to discuss this issue further, let me know. Thank you.

Customer: replied 1 year ago.
NO TY
Expert:  emc011075 replied 1 year ago.

Great. And if you found my answers helpful, a Positive Rating (3 or more stars) would be greatly appreciated. Receiving rating is the only way I get credit for helping you today.