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Ask WomensFinance? : Answer |
Q: What is an Education IRA?
A: The Taxpayer Relief Act of
1997 created a special IRA that allows you to invest up $500 per child each year to pay
for the costs of higher education. As long as you meet certain requirements, the
beneficiary can be your child, grandchild, or any other designated individual under the
age 18. Although an Education IRA is held in a child's name, a parent or guardian is
actually in control of the account -- maintaining responsibility until all assets have
been dispersed.
Contributions
Contributions made to an Education IRA are phased out for donors with modified adjusted
gross incomes (AGI) that meet the following schedule:
| |
Full |
Partial |
None |
Single |
$95,000 |
$95,000-$110,000 |
$110,000 |
Married |
$150,000 |
$150,000-$160,000 |
$160,000 |
Withdrawals
While contributions to an Education IRA are not tax deductible, distributions are tax-free
as long as you use the money to pay for qualified higher education expenses (for a
beneficiary still under age 30). Tuition, books, fees, and other supplies generally count
as education expenses.
If the money is not used for educational purposes within 30 days of the beneficiaries'
30th birthday, all earnings in the account will be dispersed, taxed as ordinary income,
and subject to a 10% tax penalty. If the beneficiary doesn't attend college, assets of the
account may be transferred directly to another family member.
Advantages
- You can contribute up to
$500 a year for each beneficiary.
- Earnings grow tax-deferred.
- Withdrawals are tax-free as
long as you use the money to pay for higher education expenses.
- Flexibility. Any qualifying
individual can contribute to an Education IRA on the behalf of another beneficiary, not
just their own dependents.
The Education IRA can be rolled over to another family member (brother, sister, son,
daughter, stepbrother, stepsister, niece, nephew, etc.) if the beneficiary doesn't use the
money to attend college. Any unused portion of the account can also be rolled over to
another Education IRA.
Tip: If you're younger than age 30 and plan on having kids, you can get a
big head start on saving for your child's education. Simply open an Education IRA in your
name, contribute to it annually (until you're age 30), and roll it over to your new son or
daughter when they're born.
- A parent or guardian named
on the account is responsible of the IRA until it's completely withdrawn.
Disadvantages
- When you consider the future
costs of a college education for your child, $500 a year may not be enough. Any delay in
opening an account for your child is lost money -- and a lot of time to make up.
- In the year that you take
distributions from an Education IRA, you become ineligible for other college savings
programs or tax credits such as a prepaid tuition plans, the Lifetime Learning Credit, or
the Hope Scholarship. A student's ability to get financial aid may be limited by the
assets that have accumulated in their Education IRA.
The Education IRA is a
great college-savings tool. If used right, it can mean the difference between having to
seek financial assistance or affording college on your own. As with any IRA, make sure
you've done plenty of research before committing to a plan.
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