By George M. Hiller, JD, LLM, MBA, CFP®
Education IRAs (officially known as Coverdell Education Savings Accounts) are special accounts that allow for tax-free distributions for the qualified education expenses of a designated beneficiary. Under prior law the maximum amount that could be contributed to an Education IRA was $500 per child per year. The 2001 Tax Act has greatly expanded and enhanced the Education IRA. Under new law effective January 1, 2002 the maximum amount that can be contributed to an Education IRA is $2,000 per child per year. Old law required that contributions be made before the end of the year. Beginning in 2002, the new law allows individuals to make Education IRA contributions up to April 15 of the following year to count as a contribution for the previous year.
Any individual (including a child) may contribute to an Education IRA subject to certain income limitations. In order to qualify the individual’s modified adjusted gross income (MAGI) must be under $220,000 on a joint return or $110,000 on a single return. There are phase out rules that apply for MAGI between $190,000 and $220,000 on a joint return and $95,000 and $110,000 on a single return. If your income is over these limits you can simply make a gift directly to the child or other family member and have that person set up an Education IRA.
The new law also allows for the accounts to continue past age 30 for “special needs” children. Special needs is intended to address individuals who need more time to complete education due to physical, mental, or emotional incapacities including learning disabilities.
Contributions to Education IRAs are not deductible. Earnings on Education IRAs are not taxable if distributed for qualified education expenses. Qualified education expenses include books, tuition, fees, supplies, equipment and also room and board. It includes expenses for college, university, graduate school training and vocational training. Also, new law allows Education IRAs to be used for education from kindergarten to high school and public, private and religious schools qualify.
Subject to certain limitations, you can rollover assets from one Education IRA account to another and you can change the beneficiary of the Education IRA. In general, rollovers and changes in the designated beneficiary are allowable if done within the designated beneficiary’s family.