Education IRA of 1997 Tax Act

Education IRA of 1997 Tax Act

Starting and contributing to an education IRA

Drawing down and closing an education IRA

Starting and contributing to an education IRA

Term "IRA" is confusing

Education "IRA" has nothing to do with retirement

But tax treatment and other technicalities lifted from nondeductible IRA law

May contribute up to $500 annually in the name of a beneficiary

Up to $500 may be contributed to education IRA regardless of beneficiary's earned income

Can only contribute to traditional IRA if you have earned income

$500 is in addition to $2,000 traditional IRA limit

Amount is contributed to a trust or custodial account for beneficiary

Contributor and beneficiary don't have to be related

Beneficiary need not be your dependent

Beneficiary could be your child, grandchild or neighbor

May not contribute to an education IRA in a given year if same person also benefits from contributions to a state university prepaid tuition program

Contributions are after-tax (no immediate tax benefit)

Must contribute before beneficiary reaches age 18

Phase-out of ability to contribute to education IRA

Single filers : modified AGI $95,000 - 110,000

Joint filers : modified AGI $150,000 - 160,000

Education IRAs may be opened after Dec. 31, 1997

Drawing down and closing an education IRA

Distributions are income tax-free if used for college expenses (including tuition, fees, books and room and board)

Tax-free education IRA distributions mutually exclusive with Hope credit and lifetime learning

Can use one and only one of these three in a given year

Any money remaining in the education IRA when the beneficiary reaches age 30 must be distributed

Earnings portion of distribution is includable in beneficiary's income

10 percent penalty tax applied to earnings distribution

An education IRA balance may be transferred to a fellow family member

No tax if old beneficiary is under age 30

Transfer tax is imposed if funds are transferred to a younger generation