My daughter would like to use some of her Roth IRA to pay for some current tuition fees and loans. Can she do this without a penalty?

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 In contrast, the earnings on those contributions cannot be withdrawn prior to age 59 1/2 or a five-year seasoning period (whichever is later) without paying income tax and a penalty.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

RELATED FAQS

  1. Can I purchase mutual funds for my IRA?

    Learn how to invest your IRA assets in mutual funds. Discover a few of the different types of mutual funds available for ...
  2. What is the Education Savings Bond Program?

    Learn about the education savings bond program and find out if you are eligible to use your savings bonds for payments toward ...
  3. Does shopping for student loans affect my credit score?

    Discover whether shopping for student loans negatively impacts your credit score, and how concentrating your applications ...
  4. How do Pay As You Go pension plans work?

    Learn how pay-as-you-go pension plans are different than fully funded pension plans and why some government plans are running ...
RELATED TERMS
  1. Senior Move Manager

    Senior move managers (SMMs) help seniors downsize and relocate ...
  2. Elder Care

    Elder care, sometimes called elderly care, refers to services ...
  3. Gold IRA

    Definition of Gold IRA
  4. Free Application For Federal Student Aid - FAFSA

    The form that must be completed in order to qualify for any type ...
  5. Student Debt

    Money owed on a loan taken out to pay for educational expenses. ...
  6. Eligible Transfer

    An IRS-allowed movement of assets into or out of an individual ...

You May Also Like

Related Articles
  1. You need to be patient, diligent and perseverant to be successful at investing, but more importantly, you need to start early.
    Investing Basics

    Why You Should Start Investing Early? ...

  2. Many of us fantasize about winning a big lottery jackpot. Let’s say that actually happened? What would you do with the money? How would you manage it?
    Professionals

    Tips For Managing A Cash Windfall

  3. Retirement

    Planning Ahead for 2015's Tax Law Changes

  4. Even though inflation currently seems tame, it's still the worst enemy of retirees. Here are some tips to reduce its impact.
    Professionals

    Tips For Managing Inflation In Retirement

  5. Retirement

    5 Crucial Tips For Your Retirement Income ...

Trading Center