Education IRA Information

Eligibility

• An education IRA or Coverdell ESA is a custodial savings account, meaning an adult must establish it on behalf of a minor beneficiary. To be eligible to contribute to an education IRA, the Internal Revenue Service (IRS) requires that your modified adjusted gross income be less than $95,000 if you file single or $190,000 if you're part of a married couple filing jointly, as of 2010. Anyone meeting the income guidelines may contribute to an education IRA, regardless of his relationship to the beneficiary.
  
  

Contribution Limits

• An education IRA has a strict limit on annual contributions. The IRS sets the maximum annual contribution at $2,000 per beneficiary, as of 2010. If contributions to an education IRA exceed this limit, the remaining amount is treated as an excess. If these funds are not withdrawn during the following tax year, they may be subject to a 6 percent excise tax.
  
  

Qualified Withdrawals

• You may use funds held in an education IRA for qualified education expenses at an eligible institution. An eligible institution includes elementary, secondary and post-secondary schools. The IRS defines a qualified expense as any amount need to pay for fees, tuition, books, supplies, equipment, special needs services, or room and board. You may also use education IRA funds to pay for uniforms, transportation, tutoring and supplementary items for students at the elementary or secondary levels.
  
  

Benefits

• Education IRAs offer several benefits in terms of their tax status. According to State Farm Insurance, earnings are allowed to grow tax-free, and qualified withdrawals are also tax-free. You can also claim the Hope or Lifetime Learning Credits in the same tax year if you are making qualified withdrawals from an education IRA as long as they are not for the same expenses. Funds held in an education IRA typically do not have a significant impact on financial aid eligibility, as they are considered the parent's assets.
  
  

Considerations

• If you make withdrawals from an education IRA that are outside the IRS guidelines, these funds are subject to regular income tax as well as a 10 percent withdrawal penalty. Additionally, you must withdraw funds prior to the beneficiary reaching age 30 to avoid additional tax penalties.