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CandleFocus Glossary Editor
An Education IRA, also known as a Coverdell Education Savings Account, is a popular tax-advantaged way to save money for educational expenses. It offers several tax benefits, allowing you to set aside money for college without having to pay taxes on the earnings. While most parents are familiar with the more widely-known 529 savings plans, the Education IRA offers some unique features which make it well-suited for certain families.
The key features of an Education IRA include:
- Contributions are limited to $2,000 per child per account each year. - Money in the account can be used to pay for qualified K-12 education expenses, as well as college tuition, room and board, books, and other related costs for post-secondary education. - The money in the account is not subject to federal or most state income taxes when it is used for education related expenses. - Any earnings from the account are tax-free.
There are some important restrictions to keep in mind when setting up an Education IRA. These include:
- Eligibility is limited to those whose Modified Adjusted Gross Income (MAGI) does not exceed certain limits: Currently, for single tax filers, the limit is $110,000 and for joint filers, the limit is $220,000.
- The account must be used before the child’s 30th birthday. - Contributions to an education IRA are not tax deductible.
In spite of these limitations, the Education IRA offers several advantages. It’s a great way to save for your child’s education in the most tax-efficient manner. Additionally, it’s a great way to set up a college fund without tying up your own retirement funds. The money in the Education IRA can be used to supplement other educational savings plans such as 529 plans and Coverdell ESA, giving you more flexibility to pay for you children’s college costs.
No single savings vehicle is perfect for everyone. The Education IRA is an excellent choice for some parents but for others, such as those who exceed the income limits, the 529 plan may be a better option. It’s important to talk to a financial advisor about your specific situation and ensure you’re making the best savings decision for your family.
The key features of an Education IRA include:
- Contributions are limited to $2,000 per child per account each year. - Money in the account can be used to pay for qualified K-12 education expenses, as well as college tuition, room and board, books, and other related costs for post-secondary education. - The money in the account is not subject to federal or most state income taxes when it is used for education related expenses. - Any earnings from the account are tax-free.
There are some important restrictions to keep in mind when setting up an Education IRA. These include:
- Eligibility is limited to those whose Modified Adjusted Gross Income (MAGI) does not exceed certain limits: Currently, for single tax filers, the limit is $110,000 and for joint filers, the limit is $220,000.
- The account must be used before the child’s 30th birthday. - Contributions to an education IRA are not tax deductible.
In spite of these limitations, the Education IRA offers several advantages. It’s a great way to save for your child’s education in the most tax-efficient manner. Additionally, it’s a great way to set up a college fund without tying up your own retirement funds. The money in the Education IRA can be used to supplement other educational savings plans such as 529 plans and Coverdell ESA, giving you more flexibility to pay for you children’s college costs.
No single savings vehicle is perfect for everyone. The Education IRA is an excellent choice for some parents but for others, such as those who exceed the income limits, the 529 plan may be a better option. It’s important to talk to a financial advisor about your specific situation and ensure you’re making the best savings decision for your family.