You may be able to contribute to an Education Individual Retirement Account (Ed IRA) to finance a child's qualified higher education expenses. The contribution is NOT deductible.

An education IRA is a trust or custodial account set up in the United States, solely for the purpose of paying qualified higher education expenses for the designated beneficiary of the account. Qualified higher educational expenses are defined as: tuition, fees, books, supplies, and equipment. This also includes amounts contributed to a qualified state tuition program, as well as, room and board if the designated beneficiary is enrolled at least half-time at an eligible educational institution. The designated beneficiary (child) must be under the age of 18 when the account is established. There is no limit to the number of education IRAs that can be established for one beneficiary. The contributions can only be made in cash and the total made for any child in one tax year cannot be greater than $500.

Any individual (including the beneficiary) can contribute to a child's education IRA if the individual's modified adjusted gross income is not more than $110,000 ($160,000 in the case of a joint return). The $500 maximum contribution per child is gradually reduced if the contributor's modified adjusted gross income is between $95,000 and $110,000 (between $150,000 and $160,000 if the return is a joint return).

Modified adjusted gross income for the purpose of determining the maximum contribution limit is the adjusted gross income shown on the 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

For distribution purposes, in general, the designated beneficiary of an education IRA can receive tax free withdrawals to pay qualified higher educational expenses. If a withdrawal does exceed the beneficiary's qualified higher education expenses, a portion of the withdrawal is taxable. The withdrawals are tax free to the extent the withdrawal does not exceed the beneficiary's qualified higher educational expenses.

Caution: The Hope Credit and the Lifetime Learning Credit cannot be claimed for a student's qualified higher education expenses in the same tax year in which the student receives a tax free withdrawal from an Education IRA unless the student chooses to pay any tax that would otherwise be owed on the distribution.

For more information see Publication 970, Publication 590, and Education IRA Tax Trails. Publications may be downloaded from this site, or ordered by calling 1-800-829-3676.

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