Magazine article Business Credit

Introducing the Education IRA

Magazine article Business Credit

Introducing the Education IRA

Article excerpt

The Taxpayer Relief Act of 1997 created the Education IRA, a new kind of IRA that's not for retirement at all. Instead, the Education IRA can help you prepare for the future education of a child important to you.

How Does it Work?

Qualifying individuals may contribute up to $500 annually to an Education IRA on behalf of a named child beneficiary under age 18, to pay qualified higher education expenses. Aggregate contributions on behalf of any child beneficiary may not exceed $500 per year. No contributions may be made to an Education IRA in any year contributions are made to a qualified state tuition plan on behalf of the child.

Do I Qualify?

To make a full contribution, your modified adjusted gross income (MAGI) cannot exceed $95,000 as a single taxpayer or $150,000 as a married couple filing jointly. Your contribution is completely phased out when your MAGI exceeds $110,000 as a single filer or $160,000 as a married couple filing jointly. If your income limits exceed the eligibility requirements, a related or unrelated contributor (grandparent, family friend, etc.) can make the contribution, provided the contributor's income falls within the aforementioned limits.

Are Contributions Tax-Deductible?

Contributions are not tax-deductible, but earnings accumulate tax-free. Contributions to Education IRAs have no impact on contributions to other types of IRAs. Additionally, contributions to Education IRAs and qualified state tuition programs are treated as gifts that qualify for the $10,000 annual gift tax exclusion.

However, distributions spent on qualified higher education expenses including tuition, fees, books, supplies - and under certain conditions room and board - are federal income tax free. Distributions must be made for qualified higher education expenses before the beneficiary reaches age 30. Any remaining assets may be rolled over to an Education IRA for a qualified family member before the beneficiary reaches age 30. Remaining assets not rolled over must be distributed to the beneficiary and any earnings will be subject to ordinary income tax and a 10 percent penalty.

Are There Benefits to Me?

Yes. Contribution to Education IRAs and qualified state tuition programs, which are treated as gifts that qualify for the $10,000 annual gift tax exclusion, can help reduce your taxable estate. …

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