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What Is an Education IRA?


An education IRA is a tax-advantaged savings account that can be used to pay for education expenses. Funds in these accounts, which are also known as Coverdell education savings accounts (ESAs), can cover the costs of tuition, books and supplies for students in grade school, high school and college. Contributions are limited to $2,000 per year and can’t be deducted from taxes, but earnings grow tax-free. The plans have to be set up to benefit specific individuals, who must be under age 18 when the plan is started, and emptied by the time the beneficiary turns 30. A financial advisor can help you plan for education expenses.

Education IRA Basics

Education IRA is another name for a Coverdell ESA. These accounts provide tax advantages to people saving for a child’s education expenses. Anyone, including parents, grandparents and even corporations and trusts, can contribute to education IRAs. However, there are income limitations, as well as caps on contributions and restrictions on how the money can be spent.

An education IRA is a trust or custodial account that names a specific individual as the beneficiary. The account can only be set up for someone who is under age 18 or, if older, has special needs. Contributions can be made up until the beneficiary’s 18th birthday, although this also can be extended if the beneficiary has special needs. All the funds in the account have to be distributed and the account must be closed after the beneficiary turns 30 unless, again, the beneficiary has special needs.

Unlike traditional IRAs used for retirement savings, contributions to an education IRA are made with after-tax dollars and cannot be deducted from one’s current income. However, the investment earnings of an education IRA grow tax-free. Withdrawals are also free of taxes as long as the money is spent on eligible expenses.

The list of eligible expenses includes tuition, books, supplies and equipment that is necessary to enroll and attend an eligible educational institution. Withdrawals can be used to pay eligible costs for any level of education, including primary, secondary and college.

Withdrawals are only free of income taxes as long as they do not exceed the total for eligible expenses. Withdrawals in excess of eligible expenses are taxed at the beneficiary’s normal income tax rate.

Limitations of Education IRAs

What Is an Education IRA?

The tax-free growth and tax-free withdrawals for eligible expenses make education IRAs useful tools to pay for a child’s schooling costs. There are, however, a number of restrictions on how they can be used and who can make contributions.

To begin with, the total allowed contribution amount is relatively low. Only $2,000 can be contributed to an education IRA each year. More than one education IRA can be set up for a single beneficiary, but the combined contributions to all education IRAs for that beneficiary can’t top $2,000 each year.

There are also income limits for contributors. Only single filers who report modified adjusted gross income (MAGI) of $95,000 or less per year can contribute a maximum $2,000. For married couples filing jointly, the income limit for the full contribution of $2,000 is $190,000 in MAGI.

As incomes rise past these cutoffs, the allowed contribution declines. Single taxpayers with a MAGI of more than $110,000 are ineligible to contribute to an education IRA. For married couples filing jointly, the maximum allowable MAGI for making any contribution to an education IRA is $220,000.

How 529 Plans Differ From Education IRAs

You can also fund education expenses with a 529 college savings plan. These plans also allow earnings from invested funds to grow without owing income taxes. Withdrawals, too, are tax-free as long as they are used to pay qualified education expenses. But there are key differences with these college savings plans compared to education IRAs. Here’s a summary of four key distinctions of 529 plans:

  • 529 plans are intended to pay for college and not lower grades of education.
  • There are no income limits for contributing.
  • Funds can be used by another family member.
  • Contribution limits vary by state but are much higher, typically $200,000 to $500,000.

Bottom Line

What Is an Education IRA?

Education IRAs provide tax-advantaged ways to save for a child’s education costs. While contributions can’t be deducted from income, funds in an education IRA can be invested and grow tax-free. Withdrawals are also tax-free when used to pay eligible expenses such as tuition and books at any qualified educational institution at the grade school, high school or college level. While contributions must stop when the beneficiary turns 18, the account has to be emptied and closed when the beneficiary reaches age 30. However, exceptions to these age restrictions exist for students with special needs.

Education Planning Tips

  • If you are wondering how you are going to pay for a child or grandchild’s educational needs, consider talking it over with a financial advisor. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Education planning involves more than just putting away some money for school. It is a process of estimating how much it will cost to attend college and then developing a plan to fund it. It starts with questions about colleges, areas of study and living arrangements, all of which can significantly impact the overall cost, opportunities for financial assistance, and more.

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