Education Saving: Roth vs. Education IRA

[Guest jdcannon]

It is my understanding that a taxpayer can open an Education IRA for just about anyone that he/she would like to (for example a neighbor's kid). I am currently using a Roth as a education savings vehicle for my son. But assuming that I was planning on using the money to pay for the higher eduction of my non-relative neighbor's son, would his education expenses be eligible as a qualified education expense? Could I draw funds out of my Roth penalty free to pay for a neighbor kid's eductaion, or does it need to be for a dependant child in order for it to be a qualified education expense?

Second question - Can a taxpayer take advantage of a hope credit or a lifetime learning credit during the same year he/she takes a tax-free distribution from a Roth to pay for education expenses?

[Guest bill mahoney]

You can always use the contributed amount for anything without paying taxes on a Roth IRA withdrawls. However anything after that will be subject to penalty and taxes for a non relative. If you want to help a non relative save for college I suggest that you look into a section 529 plan.

[Guest Paul Leslie]

Lets do question two first--yes because you withdraw your contributions from a Roth IRA for any purposes. You are not getting that money back tax free because you already paid tax on it before it was contributed. Penality free is not the same as tax free. So that would not affect your hope or life time credit.

Your first question is no-- the only people that would qualify would spouse or any child or grandchild of either spouses. To take money out of Roth or Traditional IRA penalty free.

If you only take out the contributions to a Roth, you can use that for anything you want. Watch out giving money to someone else other than a spouse is a gift and could require a gift taxes.