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 less than $110,000 ($160,000 on a joint return). The $500 maximum contribution for each contributor 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Amounts deposited in the accounts grow tax free until distributed (withdrawn).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, distributions from an account are not more than a child’s qualified higher education expenses (defined later) at an eligible educational institution (defined later), the distributions are not taxable. See Are Distributions Taxable, 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. It must be created or organized in the United States.

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

Designated beneficiary. The designated beneficiary is the individual on whose behalf the trust or custodial account has been established.

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

1. Tuition.
2. Fees.
3. Books.
4. Supplies.
5. Equipment.
6. Amounts contributed to a qualified state tuition program. State tuition programs are discussed in Publication 970, Tax Benefits for Higher Education.
7. 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 Limits

There are two yearly limits, one on the total amount that can be contributed for each designated beneficiary (child) 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 for a tax year. This includes contributions (other than rollovers) to all the child’s education IRAs from all sources. Rollovers are discussed at Can Education IRA Assets Be Moved?, later.

Limit for each contributor. You can contribute up to $500 for each child for any tax 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. This limit may be reduced as explained next.

Reduced limit for certain contributors. If your modified adjusted gross income (defined next) is between $95,000 and $110,000 (between $150,000 and $160,000 if filing a joint return), your $500 limit for each child is gradually reduced. If your modified adjusted income is $110,000 or more ($160,000 or more if filing a joint return), 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 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 IRAs 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. However, amounts distributed from the education IRA to be contributed to the qualified state tuition program are not excess contributions.
3. Excess contributions for the preceding year, reduced by the total of the following two amounts:
   1. Distributions (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.

When Contributions Can Be Made

You can make contributions to an education IRA for a year at any time during the year. The last day you could have made a contribution for 2000 was December 31, 2000.

Other Contribution Rules

You can contribute only cash to an education IRA. You also cannot contribute to an education IRA after the beneficiary reaches age 18.

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 distributed from an education IRA and rolled over to another education IRA for the benefit of the same designated beneficiary or a member 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 distribution.

Members of the beneficiary’s family. The beneficiary’s spouse and the following individuals (and their spouses) are members of the designated beneficiary’s family.

1. The beneficiary’s child, grandchild, or stepchild.
2. A brother, sister, stepbrother, or stepsister of the beneficiary.
3. A son or daughter of the beneficiary’s brother or sister.
4. The father, mother, grandfather, grandmother, 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 the 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 Because of 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.

Are Distributions Taxable?

Distributions that are not more than the designated beneficiary’s qualified higher education expenses during the year are generally tax free. The portion of any distribution that is more than the education expenses may be taxable.

What Determines the Tax Treatment of Distributions?

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 distribution is tax free if it is not more than the designated beneficiary’s qualified higher education expenses in a tax year.

You cannot take a tax deduction or credit for educational expenses you use as the basis for a tax-free distribution from an education IRA.

Waiver of tax-free treatment. If you are the designated beneficiary, you can waive the tax-free treatment of the education IRA distribution and elect to pay any tax that would otherwise be owed on the distribution. You or your parents may then be eligible to claim a Hope credit or lifetime learning credit for qualified higher education expenses paid with the distribution in that tax year.

Distributions more than expenses. Generally, if the total distributions for a tax year are more than the qualified higher education expenses, a portion of the amount distributed is taxable and the beneficiary must include it in income. 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 you must include 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 distributed when either one of the following two events occurs.

1. The designated beneficiary reaches age 30. In this case, the remaining assets must be distributed 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 distributed within 30 days after the date of death.

Exception for transfer to surviving spouse or family member. If an education IRA is transferred or rolled over to a surviving spouse or other family member (defined earlier) under age 30 when distribution is required under these rules, there are no income tax consequences as a result of the transfer.

More information. For a more detailed discussion of these rules, see Publication 590.

---

Previous | First | Next

Publication 17 | 2000 Tax Year Archives | Tax Help Archives | Home