Do You Know the Education IRA Rules?
More than ever, it is important for your children to get the education they need for a prosperous life. The economic climate is such that your children will need all the weapons they can muster in the work arena. At the same time that education becomes increasingly important, the cost of education skyrockets. Saving in a college fund is not as easy as it once was. More people are looking at the benefits of an Education IRA (Individual Retirement Account) but before you go that route, it is important to know the Education IRA rules if you want to maximize its usefulness to you and your children.
First, what is an Education IRA? It is simply a tax-deferred investment vehicle which was established on January 1, 1998. It is not technically an IRA at all but the focus is for education expenses. The basic rules are:
- Start early to maximize its benefits.
- You can invest up to $2,000 a year.
- While the money invested is non-taxable – so long as the money is used for eligible educational expenses such as tuition, supplies, books and room and board.
- The more money you make, the less you can contribute to an education IRA.
- If a single parent has more than $110,000 gross annual income per year, he or she is not eligible to contribute to an Education IRA. For both parents the cut-off amount is $220,000 joint annual income.
- If the designated Education IRA child does not go to college, the Education IRA rules are that it can go to another of your children.
- While the Education IRA is not taxable, if the student uses the money for things other than eligible educational expenses, account, the tax must be paid and with an additional 10% tax.
- Talk to an IRS agent to get the best deal you can before investing in an Education IRA.