Any individual (including the child for whose benefit the account is established) can contribute to an education IRA if the individual's modified adjusted gross income for the year is less than $110,000 ($160,000 in the case of a joint return). Contributions must be in cash, and cannot be made after the beneficiary reaches age 18.

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 year.

No contributions can be made to an education IRA on behalf of a child if any amount is contributed during the year to a qualified state tuition program on behalf of the same child.

Modified adjusted gross income. For most taxpayers, modified adjusted gross income will be their adjusted gross income (AGI) as figured on their federal income tax return. On Form 1040, AGI is line 33. On Form 1040A, AGI is line 19. However, you must modify your AGI if you excluded income earned abroad or from certain U.S. territories or possessions. If this applies to you, increase your AGI by the following amounts you excluded 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 Puerto Rico, Guam, American Samoa, or the Northern Mariana Islands.

Contribution Limits

There are two yearly limits, one on the total amount that can be contributed for each designated beneficiary (child) in any year and one on the amount that any individual can contribute for any one child for a year.

Limit for each child. The total of all contributions to all education IRAs set up for the benefit of any one designated beneficiary (child) cannot be more than $500 in a year. This includes contributions (other than rollovers) to all the child's education IRAs from all sources. Rollovers are discussed under Rollovers and Other Tranfers, later.

Limit for each contributor. You can contribute up to $500 for each child for any year. This is the most you can contribute for the benefit of any one child for any year, regardless of the number of education IRAs set up for the child. However, this limit may be reduced as explained below.

Education IRA Contributions at a Glance

If your modified adjusted gross income (defined earlier) is between $95,000 and $110,000 (between $150,000 and $160,000 if filing a joint return), the $500 limit for each child is gradually reduced (see Figuring the limit, next). If your modified adjusted gross income is $110,000 or more ($160,000 or more if filing a joint return), you cannot contribute to anyone's education IRA.

Figuring the limit. To figure the limit on the amount you can contribute for each child, multiply $500 by a fraction. The numerator (top number) is your modified adjusted gross income minus $95,000 ($150,000 if filing a joint return). The denominator (bottom number) is $15,000 ($10,000 if filing a joint return). Subtract the result from $500. This is the amount you can contribute for each child.

Example. Paul, who is single, had modified adjusted gross income of $96,500 for the year. Paul can contribute up to $450 for each child, figured as follows.

1. $96,500 - $95,000 = $1,500
2. $1,500 x $15,000 = 10%
3. 10% x $500 = $50
4. $500 - $50 = $450

Additional Tax on Excess Contributions

A 6% excise tax applies each year to excess contributions that are in an education IRA at the end of the year. Excess contributions are the total of the following three amounts.

1. Contributions to any child's education IRA for the year that are more than $500 (or, if less, the total of each contributor's limit for the year, as discussed earlier).
2. All contributions to a child's education IRA for the year if any amount is also contributed during the year to a qualified state tuition program on behalf of the same child.
3. Excess contributions for the preceding year, reduced by the total of the following two amounts:
   1. Withdrawals (other than those rolled over as discussed later) made during the year, and
   2. The contribution limit for the current year minus the amount contributed for the current year.

Exceptions. The excise tax does not apply if the excess contributions (and any earnings on them) are withdrawn before the due date of the beneficiary's tax return (including extensions). If the beneficiary does not have to file a return, the tax does not apply if the excess contributions (and the earnings) are withdrawn by April 15 of the year following the year the contributions are made. The withdrawn earnings must be included in the beneficiary's income for the year in which the excess contribution is made.

The excise tax also does not apply to any rollover contribution.

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