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Paying for College
The Education IRA |
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.
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