• Even SIMPLE IRA withdrawals taken for educational purposes must be reported on tax returns.tax forms image by Chad McDermott from Fotolia.com
  
  SIMPLE, which stands for Savings Incentive Match Plan for Employees, is a type of individual retirement account (IRA) employers can set up for their employees. Typically, you must wait until you exceed 59 1/2 years old to take money out of the account without paying an early withdrawal penalty. However, if your early withdrawal goes toward qualified higher educational costs, you can remove the money at any time without paying the 10 percent early withdrawal penalty.
  
  

Educational Expenses

• Qualified educational expenses allow you to avoid the early withdrawal penalty on SIMPLE IRA withdrawals taken before you reach age 59 1/2. According to the IRS, qualified higher education costs include tuition and fees required to attend any eligible educational institution. In addition, if the student attends at least half-time, based on the number of credits being taken, the costs of room and board can also be included as qualifying expenses.
  
  

Qualifications

• In order to qualify, you must pay the educational expenses for yourself, your spouse, your children or your grandchildren. Qualified institutions of higher education include all post-secondary educational institutions eligible to participate in the student aid programs run by the Department of Education, including colleges, universities and vocational schools. According to the IRS, the school can tell you whether or not it qualifies if you have any doubts.
  
  

Tax Reporting

• When you take an early withdrawal from your SIMPLE IRA for the purpose of education expenses, you must document the withdrawal on your income tax return. First, you must file using Form 1040 or 1040A and report the amount of the withdrawal as taxable income. Even though IRS waives the early withdrawal penalty, the income tax on the money is not waived. You must also complete Form 5329 to document the reason for the waiver of the early withdrawal penalty, writing the code "08" next to line two.
  
  The IRS does not require you to submit documentation of your educational expenses when you request the distribution from your SIMPLE IRA, nor when file your income tax return. However, you should keep a copy of your receipts in the event that you tax return is audited so that you can prove your use of the funds for educational costs.