You may be able to contribute up to $500 each year to an education individual retirement account (education IRA or Ed IRA) for a child under age 18. Contributions to an education IRA are not deductible.

Any individual (including the child) can contribute to a child's education IRA if the individual's modified adjusted gross income (defined later) is not more than $110,000 ($160,000 on a joint return). The $500 maximum contribution for each child is gradually reduced if the individual's modified adjusted gross income is between $95,000 and $110,000 (between $150,000 and $160,000 on a joint return). See Who Can Contribute to an Education IRA?, later.

There is no limit on the number of education IRAs that can be established designating the same child as the beneficiary. However, total contributions for the child during any tax year cannot be more than $500.

Amounts deposited in the accounts grow tax free until distributed (withdrawn).

If, for a year, withdrawals from an account are not more than a child's qualified higher education expenses (defined later) at an eligible educational institution (defined later), the child will not owe tax on the withdrawals. See Distributions, later, for more information.

What Is an Education IRA?

An education IRA is not a retirement arrangement. It is a trust or custodial account created only for the purpose of paying the qualified higher education expenses (defined later) of the designated beneficiary of the account. To be treated as an education IRA, the account must be designated as an education IRA when it is created.

Trust requirements. The document creating and governing the trust must be in writing and must satisfy certain requirements. See Publication 590.

Designated beneficiary. The individual named in the document creating and governing the trust or custodial account to receive the benefits of the funds in the account is the designated beneficiary.

Qualified higher education expenses. These are expenses required for the enrollment or attendance of the designated beneficiary at an eligible educational institution. The term "qualified higher education expenses" means expenses for:

1. Tuition,
2. Fees,
3. Books,
4. Supplies, and
5. Equipment.

The term also includes:

1. Amounts contributed to a qualified state tuition program. (State tuition programs are discussed in Publication 970, Tax Benefits for Higher Education.)
2. Room and board if the designated beneficiary is at least a half-time student at an eligible educational institution. A student is enrolled at least half-time if he or she is enrolled for at least half the full-time academic workload for the course of study the student is pursuing as determined under the standards of the institution where the student is enrolled. Room and board is limited to:
   1. The school's posted room and board charge for students living on-campus, or
   2. $2,500 each year for students living off-campus and not at home.

Eligible educational institution. This is any college, university, vocational school, or other postsecondary educational institution eligible to participate in the student aid programs administered by the Department of Education. It includes virtually any accredited public, nonprofit, or proprietary (privately owned profit-making) postsecondary institution.

Who Can Contribute to an Education IRA?

Any individual (including the designated beneficiary) can contribute to a child's education IRA if the individual's modified adjusted gross income (discussed later) for the tax year is less than $110,000 ($160,000 for married taxpayers filing jointly).

Contributions can be made to one or several education IRAs for the same child provided that the total contributions are not more than the contribution limit (defined later) for a tax year.

Qualified state tuition program. No contributions can be made to an education IRA on behalf of a beneficiary if any amount is contributed during the tax year to a qualified state tuition program on behalf of the same beneficiary. For more information on state tuition programs see Publication 970.

Contribution Limit

The maximum total contribution for each designated beneficiary (child) is $500 for a tax year. This includes contributions to all the child's education IRAs from all sources other than rollovers. See Can Education IRA Assets Be Moved?, later.

Reduced limit for certain contributors. If your modified adjusted gross income is between $95,000 and $110,000 (between $150,000 and $160,000 for married taxpayers filing jointly), the $500 maximum contribution for each child is gradually reduced. If your modified adjusted gross income is $110,000 or more ($160,000 or more for married taxpayers filing jointly), you cannot contribute to anyone's education IRA. See Publication 590 for more information.

Modified adjusted gross income. Your modified adjusted gross income for the purpose of determining the contribution limit is the adjusted gross income shown on your return, increased by the following exclusions from your income.

1. Foreign earned income of U.S. citizens or residents living abroad.
2. Housing costs of U.S. citizens or residents living abroad.
3. Income from sources within:
   1. Puerto Rico,
   2. Guam,
   3. American Samoa, or
   4. The Northern Mariana Islands.

Additional tax on excess contributions. A 6% excise tax applies to excess contributions made on behalf of a designated beneficiary each year they remain in the account.

The penalty does not apply if the excess contributions (and any earnings on them) are withdrawn before the tax return for the year is due.

Even if the beneficiary of an education IRA is not required to file a return for the year, the contributions (and the earnings on them) must be withdrawn on or before a certain date to avoid the penalty. The due date for these beneficiaries is the 15th day of the 4th month of the year following the year the contributions were made.

Other contribution rules. You can contribute only cash to an education IRA. You cannot contribute to an education IRA after the beneficiary reaches his or her 18th birthday.

Can Education IRA Assets Be Moved?

You can roll over assets from one education IRA to another. You can also change the designated beneficiary or transfer the beneficiary's interest to a spouse or former spouse.

Rollovers

Any amount withdrawn from an education IRA and rolled over to another education IRA for the benefit of the same designated beneficiary or certain members of the designated beneficiary's family is not taxable. This rule applies only if the beneficiary of the new IRA is under age 30 on the date of the rollover contribution to the new IRA.

An amount is rolled over if it is paid to another education IRA within 60 days after the date of the withdrawal.

Members of the beneficiary's family. The beneficiary's spouse and the following individuals and their spouses are members of the beneficiary's family.

1. The beneficiary's child, stepchild or a descendent of either.
2. A brother, sister, half brother, half sister, stepbrother or stepsister of the beneficiary.
3. A son or daughter of the beneficiary's brother, sister, half brother or half sister.
4. The father, mother, stepfather or stepmother of the beneficiary.
5. A brother or sister of the beneficiary's father or mother.
6. The beneficiary's son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law.

Only one rollover per education IRA is allowed during a 12-month period ending on the date of the payment or distribution.

Changing the designated beneficiary. The designated beneficiary can be changed to certain members of the beneficiary's family (listed earlier). There are no tax consequences if, at the time of the change, the new beneficiary is under age 30.

Transfer incident to divorce. The transfer of a designated beneficiary's interest in an education IRA to his or her spouse or former spouse under a divorce or separation instrument is not a taxable transfer. After the transfer, the interest will be treated as an education IRA in which the spouse or former spouse is the designated beneficiary.

Distributions

The designated beneficiary of an education IRA can take withdrawals at any time. The withdrawals are tax free to the extent the withdrawals do not exceed the designated beneficiary's qualified higher education expenses during the year. See When Must Education IRA Assets Be Distributed?, later.

Are Distributions Taxable?

The tax treatment of distributions (withdrawals) from an education IRA depends, in part, on the qualified higher education expenses that a designated beneficiary has in a tax year.

Distribution not more than expenses. Generally, a withdrawal is tax free if it is not more than the designated beneficiary's qualified higher education expenses in a tax year.

Waiver of tax-free treatment. The student may waive the tax-free treatment of the education IRA distribution and elect to pay any tax that would otherwise be owed on the distribution. The student or the student's parents may then be eligible to claim a Hope credit or lifetime learning credit for qualified higher education expenses paid in that tax year.

Distributions more than expenses. Generally, if the total withdrawals for a tax year are more than the qualified higher education expenses, a portion of the amount withdrawn is taxable to the beneficiary. For more information, see Publication 590.

Additional tax. Generally, if you receive a taxable distribution, you must pay a 10% additional tax on the amount included in income.

Exceptions. There are exceptions to the 10% additional tax for special situations such as the death or disability of the designated beneficiary. For more information, see Publication 590.

When Must Education IRA Assets Be Distributed?

Generally, any assets remaining in an education IRA must be withdrawn when either one of the following two events occurs.

1. The designated beneficiary reaches age 30. In this case, the designated beneficiary must withdraw the remaining assets within 30 days after he or she reaches age 30.
2. The designated beneficiary dies before reaching age 30. In this case, the remaining assets must generally be withdrawn within 30 days after the date of death.

The withdrawn earnings that accumulated tax free in the account, generally, must be included in taxable income.

Exception for transfer to surviving spouse or family member. If an education IRA is transferred to a surviving spouse or other family member (defined earlier) under age 30 as a result of the death of the designated beneficiary, the education IRA retains its status. This means that the spouse or other family member is treated as the designated beneficiary of the education IRA. There are no income tax consequences as a result of the transfer.

Previous | First | Next

Publication 17 | 1998 Tax Year Archives | Tax Help Archives | Home