All Contributions Out First

• When you take out money early from a Roth IRA, you remove all your contributions first. This is to your advantage as a taxpayer because the contributions never get taxed or penalized when you withdraw them. After withdrawing all of your contributions, then you start taking out the earnings, which are subject to early withdrawal penalties if you are not 59 1/2 years old, and your Roth IRA is not at least five tax-years old, when you take the distribution.
  
  

Qualifying College Expenses

• The Roth IRA waiver of the early withdrawal penalty for college expenses is much more liberal than the limits for many of the education tax deductions and credits. In addition to tuition, you can include the cost of supplies, books and other equipment needed. If the student is enrolled for at least half as many credit hours as a full-time student at the institution, even room and board is included. You can pay qualifying education expenses for your spouse and dependents as well as yourself.
  
  

No Income Tax Break

• Because you use your Roth IRA earnings withdrawal for college expenses, you avoid the early withdrawal penalty, but you do not avoid the income taxes. When you file your taxes, you have to add your Roth IRA earnings distribution to your other taxable income, to be taxed at your marginal income tax rate. Even if your Roth IRA distribution bumps you into the next tax bracket, only the portion of your Roth IRA earnings falling in that bracket are taxed at that rate, not your entire income.
  
  

Tax Reporting

• To avoid paying the early withdrawal penalty on your Roth IRA earnings because you used them for college tuition, you need to file Form 5329. Next to line 2, write "08" because that signifies to the IRS that you used the money for educational expenses. On your income tax return, report the earnings as a taxable IRA distribution. If you withdrew any contributions, report those as a nontaxable IRA distribution.