Congress Expands Education IRAs

Education IRAs were recently renamed "Coverdell education savings accounts," which may be a more suitable title. That's because an education individual retirement account (IRA) is not a retirement account at all. It is a custodial savings account created to pay for a child's school expenses at any accredited college, university, or vocational school.

The rules allow anyone, not just parents, to contribute to an account for any child under age 18. Contributions are nondeductible, and the total contributions made for a child cannot exceed $500 per year. To contribute the full amount, your income must be under $95,000 ($150,000 on a joint return). The earnings in the account are never taxed, as long as the money is used to pay for qualifying expenses, such as tuition, fees, books, supplies, and certain room and board expenses.

The 2001 Tax Relief Act expands education savings accounts, beginning in 2002. The maximum contribution limit increases to $2,000 per year. Starting next year, the funds can also be used for elementary and secondary (K-12) school expenses at public, private, or religious schools. Depending on how your state defines a "school," home school expenses may also qualify. Currently only seventeen states define home schools as "private" schools.

For a summary of changes see: Coverdell Educational Savings Plans - Changes During 2001

To discuss education savings accounts in more detail, as well as other alternatives for tax-favored education savings, please contact us.

Related Information:
        College Savings - Section 529 Plans Overview
        Coverdell Educational Savings Plans - Changes During 2001
        Education IRAs - Regulations as of December 31, 2000
        Ideas and Information About Taxes
        Personal Financial Planning
        Selecting a Tax Advisor
        Tax Services
        Taxes and College Financial Aid

© Copyright 2001 Raymond S. Kulzick. All rights reserved. 010901.