Year after year, the expenses for college rise and some parents find it difficult to raise money for their child’s college education. Some parents have opted to save money for their child’s college via trust fund. But still, there isn’t just enough money to pay for other college expenses and miscellaneous. One way to make sure that there is money by the time a child reaches college is through education IRA.
It is an account specifically created to cater the financial needs of parents with children who will be going to college. It was created almost 10 years ago, January 1, 1998 to be exact. It takes money and years to build up a strong foundation for your child’s college expenses. But just like any investment, it is best started while the child is still young and the over-all expenses are still minimal.
If you want to invest on education IRA for your child who is under 18 year old, you can deposit up to $ 500 per year. Other immediate family members can chip in and contribute to your child’s education IRA, but make sure that your over-all contributions do not exceed the limit of $ 500 per one tax year.
The money you will put up for your child’s account will be taxed, but the earnings are non-taxable so long as the funds are paid for eligible college expenses. These expenses include the college tuition fee, laboratory and supplies, room and board, and books. You may want to check with the IRS for the detailed information about the eligible fees to be paid. If you prefer a financial planner, you may want to do the same step before paying for anything, because the last thing you would want to do is pay for extra fees.
A rule of thumb when considering an education IRA is: as your income increases, the less you can contribute. This rule applies for parents who have a limited or maximum allowable contribution for their child’s account. For instance, a single parent, unmarried, whose gross income is $ 96,500 in one taxable year, can make a maximum contribution of $ 450 per child for that specific year. For married couples who are filing joint taxes, with an income of $ 160,000, cannot contribute to an education IRA.
The bottom line here is this, if a single parent or both parents have more than $ 110,000 gross annual income per taxable year, they are prohibited to contribute to an education IRA. The IRS prohibits any parent to do so if that is the case.The contributions you will make for your child are non-taxable. However, when your child withdraws the funds, appropriate taxes will be deducted. Provided that your child complies with the rules governing the education IRA, taxes will not be charged. Only eligible college expenses are allowed in order to enjoy the tax free withdrawals.
If your child doesn’t want to go to college, you can turnover the education IRA account to one of your children. The turnover account will not be taxed as long as the rules are followed. However, if you let your child- the beneficiary of the education IRA account, withdraw the funds- he/she will be required to pay for an additional 10% tax. Check the IRS for details for this option.
One good tip before deciding to open an education IRA account for your child is to seek advice from the IRS. The process is quite easy and simple, but the complexity regarding tax rules needs more attention than anything else. Consult an IRS agent regarding this matter to ensure that your education IRA will be beneficial to you and your child.