Roth IRA Audit 2026: The "Tuition Trap" & The Two 5-Year Rules

Описание: You’ve been told that a Roth IRA is the ultimate "Backup College Fund." You assume that because you can withdraw your contributions anytime, you can also use the growth to pay for tuition tax-free. You are wrong. You just walked into the "Earnings Tax Trap."

While IRC Section 72(t)(2)(E) provides a specific exception to the 10% penalty for higher education expenses, it does NOT provide an exception to the income tax on earnings. If you touch a single dollar of investment growth before age 59½ to pay for college, you will owe ordinary income tax on that money—even if the penalty is waived.

As The Finance Observer, I’ve performed a forensic review of IRC Section 408A (The Ordering Rules) and Form 5329 to explain exactly how to extract cash without triggering a tax bill. In this video, we dissect the "Two 5-Year Rules," why the American Opportunity Tax Credit (AOTC) creates a "Double Dip" conflict, and the specific code you must manually enter on your tax return to stop the IRS computer from flagging you.

FORENSIC BREAKDOWN:

0:00 The Strategy: Why the Roth IRA pulls "Double Duty" as an Education Fund

01:15 The Authority: IRC Section 72(t)(2)(E) (The Penalty Exception, not the Tax Exception)

01:31 The "Ordering Rules": IRC Section 408A (Contributions First - Conversions Second - Earnings Last)

02:17 The Buckets: Why Contributions are always tax-free/penalty-free

03:06 The "Two 5-Year Rules": Confusing Earnings (Account Age) with Conversions (5-Year Clocks)

03:51 The "Earnings Trap": Why Education is NOT a "Qualifying Event" for tax-free earnings

04:53 The Expenses: What counts as "Qualified Higher Education Expenses" (Tuition, Books, Room & Board)

05:14 The "Double Dip": Why you cannot use the same dollars for AOTC and a Penalty-Free Withdrawal

06:03 The "Code 08" Hack: How to file Form 5329 to override the 1099-R penalty flag

07:30 The Verdict: Roth IRA Flexibility vs. 529 Plan Tax-Free Growth

DISCLAIMER: I am The Finance Observer. This content is for educational purposes only. Withdrawals from a Roth IRA are tax-free and penalty-free only if they are "Qualified Distributions" (5-year rule + age 59½, death, or disability). Education expenses are NOT a qualified distribution event, meaning earnings withdrawn for college are subject to income tax, though the 10% penalty is waived under IRC Section 72(t)(2)(E). You must file Form 5329 to claim this exception. Always consult a qualified CPA.