s are investment vehicle
s through which US investor
s may save for the higher education
expenses of a minor
The fact that it is referred to as an Education IRA has struck some as being a little odd, as the assets in these accounts may not be used for retirement income. However, Education IRAs do share much in common with (especially) Roth IRAs. Education IRAs have the following features:
- Contributions are limited to $500 per year per beneficiary (the minor whose name is on the account), and contributions may be made up to the beneficiary's 18th birthday. However, contributors with high incomes (between $95,000 and $110,000 for those who file income taxes singly; between $150,000 and $160,000 for those filing jointly) may see their ability to contribute reduced or eliminated.
- Assets in the account grow free from current taxes.This money may be allocated among a wide variety of investments, such as stocks, bonds, or mutual funds.
- Contributions are nondeductible when made, but qualified withdrawals (in this case, for educational expenses such as tuition, fees, books, and certain room and board charges) are made tax free.
- Education IRA assets must be distributed by the time the beneficiary reaches his/her 30th birthday. If they are removed from the account at this point and not used for educational purposes, the money may be taxable to the beneficiary, and he/she may have to pay a 10% penalty. The money may be transferred to a minor in the same family, if there is one, in order to avoid this.
So there you go: it's a nice option, but the truth is that $500 per year is not going to pay for anyone's college education, though you may use it to pay for pretty much any course of higher learning. Legislation to increase the Education IRA contribution limit to $2,000 or even $5,000 have been introduced before the 107th Congress (H.R. 676, which proposes a multiyear phase in to $2,000 is probably the one to watch), but it will be some time before any such reform is enacted.
One caveat: no contributions to an Education IRA are allowed in any year when someone makes a contribution in the beneficiary's name to a qualified state tuition program. These are becoming more popular, so make sure not to double up your college savings in this way.