The Pros and Cons of an Education IRA

The Coverdell Education Savings Account, formerly known as the, “Education IRA” has expanded greatly with the Economic Growth and Tax Relief Reconciliation Act (EGGTRRA).  This act allows contributions up to $2,000 per person (student) annually and can be set up with just about any mutual fund company or broker.

However, just as with anything, there are pro’s and con’s to an Education IRA. Here are some of the: 

Pro’s

  • Lots of flexibility in investment choices.
  • Money can be used for pre-college, private school and well as college tuition and expenses.
  • Tax-free withdrawals for qualified educational expenses, like tuition, books, uniforms, transportation, etc.
  • Expenses may be lower than some state 529 college savings plans.
  • Contributions may be made up to April 15 (tax day) of the following year.
  • Anyone can contribute as long as they meet the earning requirements (see cons for exact numbers)
  • Earning potential can increase when combined with a 529 college savings plan ( as long as the total contribution is less than $11,000 per child annually).
  • New regulations state that an Education IRA’s (or Coverdells) are to be considered exactly the same as the state 529 college savings plans when in comes to financial aid: 5.6% is counted as the parents’ asset.

Now the Con’s

  • Total contributions cannot exceed $2,000 per person, no matter how many contributors there are.
  • If you earn between $95,000 and $110,000 and you’re single, or $190,000 and $220,000 for married filing jointly folks, your contributions will be limited. If you make more than that, contributions are not allowed.
  • Beneficiaries can’t be older than 18, unless the beneficiary is considered to have special-needs.
  • If the money isn’t used by age 30, the funds are taxed as regular income, plus a 10% penalty (except for beneficiaries with special needs).  However, rollover accounts are allowed, as long as the funds go towards another family member.
  • No refunds for not going to school.
  • No state deduction for contributions.
  • Accounts can lose money.

Deciding to invest into such an account is not one that should be made in haste. But then again, when it comes to the future of your family, nothing should be.

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