Education IRA’s
With the cost of a college education rising
dramatically, it’s difficult to imagine how you will pay your young child’s
tuition. Education
IRA’s offer parents, and other relatives, a chance to save money specifically for
higher education expenses. Every child under 18 can have $2000 deposited into an Education
IRA a year thanks to the increase in this year's tax law.
An Education
IRA can be used to pay for tuition fees, books, supplies, and equipment at any
eligible higher education institution. Room and board may also be paid for with an Education
IRA if the student is enrolled at least half time. Room and board is limited to the
posted rate of room and board for on campus housing, or $2500 a year for a student who
lives off campus but not at home.
A child can have more than one Education
IRA, but the combined contributions can’t be more than $2000 in any year. Any
contributions in excess of $2000 a year are taxed at 6%. Although contributions are not
tax deductible, they grow tax free until withdrawn, and as long as withdrawals are not
more than the qualified higher education expenses the student will not owe taxes. If the
student withdrawals more than his qualified expenses, the withdrawals will be taxed at
10%.
Anyone can deposit $2000 a year into an Education
IRA for any child, within certain income limits. Your Adjusted Gross Income must be
less than $95,000 ($190,000 jointly), if you earn between $95,000-110,000
($190,000-220,000 jointly) the limit is gradually reduced, and if you earn more than
$110,000 ($220,000 jointly) you can’t contribute to a child’s Education IRA.
Since there is no minimum income for a person to contribute to an Education
IRA, any person whose income is above the limit, can give the child a gift, and the child
can then deposit the gift into the Education IRA. Education
IRA’s can also be used in combination with a Roth
IRA, which has a yearly limit of $3000, giving children an added advantage to a
financially secure future.
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