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With the cost of a college education rising dramatically, it’s difficult to imagine how you will pay your young child’s tuition. Education IRA’s offer parents, and other relatives, a chance to save money specifically for higher education expenses. Every child under 18 can have $2000 deposited into an Education IRA a year.
An Education IRA can be used to pay for tuition fees, books, supplies, and equipment at any eligible higher education institution. Room and board may also be paid for with an Education IRA if the student is enrolled at least half time. Room and board is limited to the posted rate of room and board for on campus housing, or $2500 a year for a student who lives off campus but not at home.
A child can have more than one Education IRA, but the combined contributions can’t be more than $2000 in any year. Any contributions in excess of $2000 a year are taxed at 6%. Although contributions are not tax deductible, they grow tax free until withdrawn, and as long as withdrawals are not more than the qualified higher education expenses the student will not owe taxes. If the student withdrawals more than his qualified expenses, the withdrawals will be taxed at 10%.
Anyone can deposit $2000 a year into an Education IRA for any child, within certain income limits. Your Adjusted Gross Income must be less than $95,000 ($190,000 jointly), if you earn between $95,000-110,000 ($190,000-220,000 jointly) the limit is gradually reduced, and if you earn more than $110,000 ($220,000 jointly) you can’t contribute to a child’s Education IRA.
Since there is no minimum income for a person to contribute to an Education IRA, any person whose income is above the limit, can give the child a gift, and the child can then deposit the gift into the Education IRA. Education IRA’s can also be used in combination with a Roth IRA, which has a yearly limit of $3000, giving children an added advantage to a financially secure future.
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