Note:  Examine the limitations and conditions very carefully before you set up an Educational IRA. You should contact your tax consultant to be sure you understand the ramifications of an IRA of this type and how it can affect you.

At first glance, the Educational IRA looks similar to traditional and Roth IRA's.  After all, higher education distributions are permitted from these accounts as well.  The crucial difference is that while qualified higher education distribution from a Traditional or Roth IRA are penalty free, the same distributions from an Educational IRA are penalty free and tax free.

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Am I eligible to contribute to an Educational IRA

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  There are two eligibility considerations for an Educational IRA.  First, the child for whom you are contributing may not have had any contributions made on his/her behalf to a state prepaid tuition program in that year.  Second, your modified adjusted gross income (MAGI) cannot exceed certain limits.  See the chart below.
• There is no requirement that the contributor have earned income.  Nor is there any requirement that the contributor be under age 70 1/2.

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• A child is defined as a person who is under the age of 18.  Contributions may be made on behalf of a child until the day before his or her 18th birthday.  Contributions on behalf of an individual age 18 or older are not permitted.

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• The law appears to allow contributors to deposit their maximum allowable contribution into Educational IRA's for as many children as desired.

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• No and neither does the child (provided the money is used for higher education expenses).  That's the best part of the Educational IRA.  Unlike a Traditional IRA, you cannot take a tax deduction for any of the contributions that you make to an Educational IRA.  However, when the beneficiary is ready to take his or her withdrawal for school, there are no taxes due on any of the interest that your money has earned.

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• The term "qualified higher education expense" means tuition, fee, books, supplies, and equipment required for the enrollment or attendance at an eligible higher education institution.  Basically, an eligible higher education institution is an area vocational school or university.
• Distributions must be made during the year in which the education expense occurred.  If distributions exceed the educational expenses, the additional amount withdrawn is a nonqualified distribution.

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• A nonqualified distribution is any distribution other than a higher education expense distribution.
• When a nonqualified distribution is taken, a ratio of contributions and earnings is withdrawn.  The earnings portion is then subject to taxes and a 10 percent penalty. 
•  Distributions made on account of death, disability, or scholarship are not subject to the 10 percent penalty.  However the earnings portion of such distributions is taxable.

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Unfortunately, no.  You can, however, roll funds over from one Educational IRA into a second Educational IRA established for the same child.

Also, a twist with the new Educational IRA is the ability to roll an Educational IRA into an Educational IRA for a new designated beneficiary who is a member of the same family (as defined by law).  That way, if a child decides not to pursue his or her education, the account can be transferred to a relative who does.