I recently started an Roth IRA account for two purposes. One being for retirement and two for help in saving for my new borns college. I was told that there would be no penalty for deducting from the account as long as the money was going to a educational institution. Is this correct?

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The question seems to be combining a couple of issues. Amounts transferred directly to an educational institution are not treated as gifts for gift tax purposes. This allows grandparents, for example, to pay tuition and also give annual exclusion gifts.

One of the exceptions to the 10% penalty for early withdrawal from retirement accounts is for higher education. The exception does not necessarily require that the amounts be transferred directly to an educational institution to avoid the 10% penalty but there is no limit on the amount of funds that can be used this way. The funds can be applied to tuition, books, supplies and even dorm fees.

There could be some income tax consequences if the Roth hasn't been around long five years and has successful investment performance but since we're talking about college for a newborn or retirement of the parents of a newborn, I'm assuming that's not an issue here.

Hello Mary Kay,
I am getting confusing or conflicting information.
Please see other thread:
using Roth IRA for childs education

I understand that early distribution do not encure a 10% penalty for qualified higher education expenses. But, are those distributions taxed as income?

I would not be over 59 1/2 years.
I will have had the account open for more than 5 years (18+)

skitown

Qualified Distributions are:

5 year existence of Roth account


AND


1. Fifty nine and one half
OR
2. First time home owner
OR
3. Disability
OR
4. Death

You would therefore have to pay taxes on the earnings portion of any w/d but not the 10% penalty.

When funds are withdrawn from a Roth, contributions come out first, then taxable amounts from conversions from a traditional IRA, then nontaxable amounts from conversins from a traditional IRA (basis from nondeductible contributions) and finally earnings.

The earnings would be taxable, but if you contribute $2,000 per year for 18 years it will take a while before you get to a taxpaying point. I hope your kids will be out of college before you're 59.5. Mine were and I thought they'd never finish.