What is an Education IRA?
The Education IRA offers tax-advantaged savings for all levels of education. Earnings on contributions of up $2,000 (in 2002) are tax-free if the proceeds are used for higher education (in 2001) and education at any level in (in 2002). In order to maintain a tax-deferred status, accounts must generally be used by age 30, but unused balances may be transferred tax-free into education IRAs for other family members.
Individuals have yet another option to save for college expenses: the “education IRA’s.” While not technically an individual retirement account, families can contribute up to the account for each child under age 18 into these savings plans. The contributions aren’t tax deductible, but the money isn’t taxed so long as it’s used for specified education expenses such as tuition and books. Students who are enrolled at least half time can use the accounts to pay for room and board. Both full-time and part-time students are eligible for these savings accounts. If the balance of the education IRA isn’t used by the time the student reaches 30, it must be withdrawn or “distributed”. At this point, the funds would be taxed and subject to a 10% penalty. This can be avoided if the balance is rolled over to another education IRA to benefit another family member. Written by: Sandra McKinnon, Consumer & Family Economics Specialist, University of Missouri Extension Cynthia E. Crawford, Ph.D., Consumer
A Coverdell Education Savings Account (ESA), formerly known as an Education IRA, is a plan that helps you save for education expenses. Funds in an ESA can be used to pay for elementary and secondary education expenses, college or university expenses, private school tuition, etc. The educational institution must be accredited (which in this case means the school can participate in various financial aid programs), but it does not have to be in the United States. An ESA may be established for any person who is under 18 years of age. Contributions to this account are limited to $2,000 per beneficiary. Once the beneficiary reaches 18, then no further funds may be contributed. Annual contributions must be made by April 15th of the following year (previously they had to be made by December 31st of the same year). The major benefit of this savings vehicle is that the funds grow free of all taxes. Distributions that are taken for the purpose of paying qualified educational expenses are not subj
