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IRAs Traditional IRA Education IRA Freedom IRA (not a CD type) Roth IRA Back to Main
What Is The Education IRA?
The Education IRA is a type of tax-advantaged savings account created by the Taxpayer Relief Act of 1997 specifically for paying qualified higher education expenses. The annual contribution limit is $2,000. In addition, the new law not only expands the types of education expenses that qualify for use with an Education IRA, it also extends an Education IRA's use to both public and private elementary and high schools. Contributions are non-deductible, earnings are tax-deferred and distributions are tax free if used to pay for the account beneficiary's qualified expenses for costs of kindergarten through 12th grade, college or trade school. Who Is Eligible to Contribute To An Education IRA? Anyone- whether related to the account beneficiary or not - may contribute toward the combined maximum of $2,000 to a child's Education IRA, provided their earned income is less than $190,000 (for married couples filing jointly) or $95,000 (individual filers). Proportionately smaller contributions are permitted for couples earning between $190,000 and $220,000 and for individuals earning between $95,000 and $110,000. Are Earnings Taxable? All distributions of earnings are tax-free and can be withdrawn at any time, either in total or partially as needed, if they are used for qualified education expenses. Any balance remaining in the account when the beneficiary turns 30 must be distributed or rolled over to a new account for the benefit of another family member. If the balance is not distributed or rolled over, the earnings portion is included in income and is subject to a 10% penalty tax. Who Controls An IRA Education Account? An Education IRA must have one "responsible individual" to oversee the account. This person decides when funds will be withdrawn and if and when funds will be rolled over to the Education IRA of a family member. You can be the "responsible individual" as long as you are a parent or legal guardian of the child.
Key Features Of New Education IRAs
Savings Example: Debbie and Jim have decided to open an Education IRA for their one year old son, Stephen, for his education expenses. If they contribute the maximum of $2,000 for each of the next 15 years they would have a total of $49,344 (assuming 6 percent compounded annually) for their son's qualified higher education. This distribution would be tax-free and their cumulative contributions would amount to $30,000. What better gift could you give a child than the gift of education? Open an Education IRA with us today and enjoy the satisfaction that comes from knowing you have contributed to a brighter future. |
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