Is it a regular or ROTH IRA. While thumper1 may be right, you may want to check what portion of the distribution is considered as income. For example, a ROTH IRA is penalty free if you used for educational purposes and you pay the tax only on the gains, not on the principal. Again, not a tax expert, but it appears that the interest will definitely count as income as you pay tax on it. I am not sure if the return of the principal will count.