Education IRAs
An education IRA is a non tax-deductible account that allows investors to make tax-free withdrawals for a child’s higher education costs. The education IRA was created by the Taxpayer Relief Act of 1997 and the IRS has yet to clarify so of the laws regarding the use of this account. There are two major eligibility requirements for the education IRA. The first is that the child for whom the account is created has not had any contributions made on his or her behalf to a state prepaid tui6tion program in the that year. Second, the investor’s modified gross adjusted income must not exceed certain limits. However, there is not requirement that the investor have earned income, nor is there a maximum age for investors. Contributions may be made for any child up until the child’s 18th birthday and the law allows investors to deposit their maximum allowable contribution into Education IRAs for as many children as desired.
The education IRA is like the Roth IRA in that the investor makes taxable deductions but can make qualified withdrawals of principal and earnings that are tax-free. The main difference between the two accounts is that while qualified higher education withdrawals from a traditional or Roth IRA are penalty free, the same withdrawals from an education IRA are tax-free and penalty-free.
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