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 In contrast, the earnings on those contributions cannot be withdrawn prior to age 59 1/2 or a five-year seasoning period (whichever is later) without paying income tax and a penalty.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

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
  2. Portable Alpha

    A strategy in which portfolio managers separate alpha from beta by investing in securities that differ from the market index ...
  3. Run Rate

    1. How the financial performance of a company would look if you were to extrapolate current results out over a certain period ...
  4. Hard Fork

    A hard fork (or sometimes hardfork) is a radical change to the protocol that makes previously invalid blocks/transactions ...
  5. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
  6. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
Trading Center