Educational IRA

An IRA may be used for more than just retirement. With an Educational IRA, you can set aside funds to be used for your child's education expenses.

With this nondeductible account, you can withdraw funds for your child's tuition or other approved educational expenses when you need them tax-free and penalty free!

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Summary
  • Save for the future
  • High rate of return
  • Flexible terms
  • Withdrawals for education are penalty-free and tax-free
  • Penalty for early withdrawal
  • Short and long term options available
  • Personal service

To find out the latest information on contribution amounts, please visit IRA.com.

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.

FAQ

Am I eligible to contribute to an Educational IRA?

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.

There is no requirement that the contributor have earned income. Nor is there any requirement that the contributor be under age 70 ½.

How does the law define a "child"?

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.

What if I want to save for more than one child?

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

Do I pay taxes on the earnings?

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.

What is a qualified higher education distribution?

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.

What is a nonqualified distribution?

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% penalty.

Distributions made on account of death, disability, or scholarship are not subject to the 10% penalty. However the earnings portion of such distributions is taxable.

Can I move funds from my Traditional or Roth IRA into an Educational IRA?

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.