Education IRAs

In today’s society the cost of sending one’s children to college can wreak havoc in a family budget. Besides using student loans many parents end up taking out second mortgages or liquidating retirement savings to meet these expenses, and the financial strain involved has certainly helped drive more than one family into Chapter 7 Bankruptcy. In order to bring some relief of this burden the Internal Revenue Code contains certain tax benefits for taxpayers with educational expense. Although these incentives are not nearly as generous as tax benefits for homeowners or oil drillers they do provide some assistance. One such form of assistance is the Education IRA.

Education IRAs, officially known as Coverdell Education Savings Accounts, allow a tax benefit for saving for educational expenses. While most people think of college, when saving for education expenses, Education IRAs can also be used for vocational schools, high schools, or even elementary schools. Unlike with some tax benefits for higher education, distributions from Education IRAs can be applied for tuition of part time students. In order for distributions to be used for room and board though, the student must be attending the educational institution at least half time.

An Education IRA is a trust fund which must be set up when the beneficiary is either under age 18 or a special needs individual. Up to $2,000.00 a year can be contributed to an education IRA. The allowable contribution is phased out for high income individuals. While the contributions are not tax deductible the income that accumulates in the trust may be distributed tax free, when it is used to pay qualified expenses. Distributions of income made for non qualifying expenses are subject to regular income tax plus a 10% penalty.