The Education IRA is an account created by the Taxpayers Relief
Act of 1997 that allows contributions to be made for the benefit of
paying for the qualified higher-education expenses for a child.
Contributions: The contribution limit is
$2,000, and the deadline to contribute is extended to April 15 of
the year following the tax year.
Eligibility:
- Single: Individuals can establish an Education
IRA for the benefit of any child under the age of 18. Full
contributions are allowed for single individuals whose AGI is under
$95,000. Partial contributions are allowed for singles whose AGI is
between $95,000 and $110,000.
- Married: Married couples can establish an
Education IRA for the benefit of any child under the age of 18.
Full contributions are allowed for married couples whose AGI is
under $150,000 in 2001 and will increase to $190,000 in 2002.
Partial contributions are allowed for married couples whose AGI is
between $150,000 and $160,000 in 2001, and this number will
increase to $220,000 in 2002.
Deductibility: All contributions are
non-deductible.
Taxes and Penalties: Distributions
are excluded from gross income and are tax-free if used for
qualified higher-education expenses. The entire account must be
distributed in the year the beneficiary reaches age 30. If not used
for education by the original beneficiary before age 30, the
account can be transferred tax-free to an Education IRA benefiting
another family member. If the account is distributed to the
original beneficiary because it was not used for education, a 10%
penalty will be assessed as well as ordinary income taxes on the
earnings portion of the distribution.