Question: My wife and I are trying to set aside money for our child's education. We thought there was an IRA for education but we're not certain. Is there one?

Sean R.

Answer:

Dear Sean,

Yes, there is an educational IRA -- the reason you may be having difficulty finding information about it is because the official name was changed from the Education IRA to the Coverdell Education Savings Account. It is named after U.S. Senator Paul Coverdell of Georgia.

The great thing about the Coverdell is that the money in the account can be used for many more purposes than is true with other "education" accounts and it's not limited to college (as is the case for the 529 College Savings Account).

Here are the key points:

• School level. Your child can be in a public, private or parochial kindergarten, grade school, high school or college.
  
  
• Annual amount. You can invest up to $2,000 a year per child. (When it was the Education IRA, that amount was only $500/year.)
  
  In addition to parents, grandparents, godparents, aunts and uncles, just plain friends can also contribute. The total from everyone, however cannot be more than $2,000 per year. Above $2,000 and the account will be hit with a 6% annual "excess contribution tax."
  
  
• Income caps. Your modified gross income must be under $220,000 as a married couple filing a joint return. If you were single, the cap would be $110,000. Parents earning more than these amounts cannot contribute.
  
  
• Taxes. The dollar amount you contribute is not taxed. The money in the account grows on a tax-free basis. The dollar amount you withdraw is not taxed - as long as it is used for "qualified" expenses.
  
  
• Qualified expenses. These include (in alphabetical order) books, computers, equipment, fees, Internet access, room & board, school supplies, software, transportation, tuition, and tutoring.
• Child's age. You can contribute to a Coverdell only while your child is under age 18. And, the money must be used by the time your son or daughter turns 30. At that point, the money in the account no longer grows on a tax-free basis - it will be taxed as ordinary income and withdrawals will be hit with a 10% tax penalty.
  
  A solution: When the beneficiary (your child) turns 30, he or she can roll over any money left in the account into a new Coverdell for a member of the family. The term "family member" includes a sibling, niece, nephew or even the original beneficiary's own child.
  
  Note: If the beneficiary of the Coverdell is a child with special needs, contributions can be made after age 18.

A word of caution: The money in a Coverdell is viewed by the IRS as belonging to the child, not the parent. That could have a negative impact when it comes to qualifying for financial aid.

Opening a Coverdell...

You can open and contribute to a Coverdell here at BUYandHOLD. You will need to provide your child's Social Security number along with yours. For details, click HERE.

For More Information

Read IRS Publication #970, "Tax Benefits for Education." You can download it at: www.irs.gov.