A:

This is a surprisingly complicated question, as it touches on the differences between traditional and Roth IRAs, as well as what counts as a "qualified education expense."

Because Roth IRA contributions are made with after-tax earnings, a person can withdraw his or her direct contributions whenever he or she likes, in whatever amounts, and for whatever purpose. In contrast, the earnings on those contributions cannot be withdrawn prior to age 59 1/2 or a five-year seasoning period (whichever is later) without paying income tax and a penalty.

IRA withdrawals that are used for qualified education expenses are exempt from the penalty. Qualified expenses include current-year tuition, fees, books, room and board, and supplies. Repaying student loans is not a qualified education expense.

For purposes of this question, then, your daughter can use 100% of her past Roth IRA contributions for any purpose (including loans). She can also withdraw the earnings on those Roth IRA contributions penalty-free, but only to pay for her current tuition fees, books and so on.

SEE: 9 Penalty-Free IRA Withdrawals

Hot Definitions
  1. Price Elasticity Of Demand

    A measure of the relationship between a change in the quantity demanded of a particular good and a change in its price. Price ...
  2. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying ...
  3. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Down Round

    A round of financing where investors purchase stock from a company at a lower valuation than the valuation placed upon the ...
  6. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
Trading Center