Education IRA is an account created by the Taxpayer Relief Act 1997. It is meant to be used for meeting the educational expenses of the student. The expenses on tuition, books, supplies and items required for enrolment or attendance at the selected institutions, also the expenses of boarding and lodging as determined by the institution or the actual amount charged by the eligible institution at the houses run by them including any other educational expenses incurred for students with special needs are exempt from taxes under this Act. All the amounts contributed into this account are also allowed to grow tax free by the government. However, there are definite limits to the amount of annual contribution that can be made into this account.
The main purpose of this account is to save enough money to meet part or whole of the college expenses. You can generally invest up to $500 per year. It can be less as the contribution depends on your income. The money in the education IRA can be invested in just about any financial instrument for better returns. However, this money is controlled by the college going child and can be spent only on his or her education. In case the money from the education IRA is not used by you it can be transferred to someone else. It maybe a relative or someone you know, who can use this money for education.
All withdrawals from the education IRA do not fall under the taxable category but the contributions to this do and are taxed at around 10% or as the case maybe at the time. The Education IRA where you can save $500 per annum can be a good choice for all those who qualify to invest under this scheme but the amount is far from sufficient to meet the child’s complete educational expenses. Therefore it is necessary to have an additional plan for meeting the educational expenses of your child
You will be exempt from paying the additional 10% tax for the year in case you pay the qualified educational expenses for yourself, your spouse or you/your spouse’s children or grandchildren. It is however necessary to enrol the student in any educational institution like any college, vocational school, university or others which is recognised and allowed to take part in student aid programmes administered by Department of Education. Some of these eligible institutions also can be found outside the U.S. Almost all accredited public institutes, postsecondary, non-profit or private are generally eligible.
Form 1099-R which you receive from the tax authorities indicates the taxable amount of your distribution (withdrawal from additional contributions, earnings or roll overs). Under this IRA scheme the taxpayers with gross incomes which are under $ 150,000 to $160,000 for joint and $95,000 to $110,000 for single fliers, are allowed to make contributions to the education of any student of 18 and under.