With the cost of college tuition continuing to rise each year, it just makes sense to plan ahead for your child’s advanced education. The best thing about taking a long-term approach to college expense planning is that it enables you to make smaller contributions to your college fund over time, rather than trying to find the money to pay for tuition in one lump sum later in life. One of the best ways to invest in your child’s future education needs is to set up an Education IRA. These purpose-specific individual retirement accounts will enable you to ensure that the money you save for educational reasons is there when you and your child need it.
Education IRAs are flexible
These plans were first developed by the Federal government, which recognized that there was a savings gap between families of high and moderate income levels. Without a specific mechanism that allowed for college savings, most moderate income families could not manage to save enough money to pay for a child’s education later in life – especially since they were taxed on the growth that did occur in any savings account. The flexibility of this form of IRA enables the money to be taxed once, when the contribution is made, and then never be taxed again. These accounts can then be used for any educational purpose, including private high school, college, and trade schools.
Are there restrictions?
Like everything else created or administered by the Government, there are important restrictions attached to an Educational IRA. To begin with, your account can only be added to until your child reaches the age of eighteen years. After that, no more contributions can be made. In addition, you are only allowed to contribute so much per year to the account. Even more important for many families is the fact that once the money is contributed, you can never get it back. Even if your child decides not to go to college, the money in the account will go to him or her and not you.
How it grows
The chief benefit that many families find in using these accounts is in the area of taxation. In normal savings accounts – and other forms of investment, for that matter, the interest earned on the principal in the account is taxed on an annual basis. This, of course, reduces the overall amount of money that is available for the child’s education when it is eventually needed most. An educational account, targeted for the sole purpose of being used for college or other education expenses, avoids the tax on interest income that a normal account would face. As interested is compounded over time, it remains with the account and free of government obligation.