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Greetings, Sharma, and welcome. You asked:

I am planning on opening a roth ira for education purposes for
my daughter. Do the withdrawals (both the basis and the appreciation)
for education expenses classify as "qualified" withdrawals so that
i can avoid tax on the withdrawals for such purpose?.


I assume the IRA will be in your name because your daughter must have earned income (i.e., income from self-employment or a job) for you to be able to make contributions to an IRA in her own name. If the IRA is in your name, then it may still be used for education expenses for your daughter.

As to your question, withdrawals for education expenses from a Roth do not constitute a "qualified withdrawal" for the purpose of avoiding income taxes. That's the bad news. The good news is that Roth withdrawal rules stipulate the first money out is your annual contribution money, and that may be taken at any time for any purpose free of income tax or early withdrawal penalty. After you use that money up, then (assuming you did NOT make a conversion contribution to the Roth from a traditional IRA)you will take money from earnings.

If you are into earnings, but are taking a withdrawal for education expenses, then you will escape any early withdrawal penalty. However, just as in a traditional IRA, you must pay income taxes on the withdrawal. The only time that will not be true is if the account has been open for at least five tax-years AND you are older than age 59 1/2 at the time of withdrawal.

For further information on Roth withdrawals, visit our IRA area at http://www.fool.com/money/allaboutiras/allaboutiras.htm or see IRS Publication 590 (Individual Retirement Arrangements) available for download at http://www.irs.ustreas.gov/forms_pubs/pubs.html.

Regards..Pixy
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