Expand College Savings with Education IRAs

By Dianna Doreen
Writer, mPower

In This Story One College Education, Please The Big Easy Funding Sources for College Tailor-Made College Funding Education IRAs Disadvantages Education IRA Pointers

The saving power of an Education IRA is hopelessly outpaced by the skyrocketing cost of putting a child through a four-year college. A $500 contribution per child, per year is all that is allowed. But, this is no reason to scrap them all together.

Education IRAs can take the intimidation factor out of starting to save for college, and can be used in conjunction with other tools to help mitigate the costs of educating your children.

minute: read this article at a glance.

Funding a college education is getting tougher, but it doesn't have to be intimidating.

True, tuition is rising by a few percentage points a year — as are all other related incidentals — and all of this means more financial stress for parents and students.

The Taxpayer Relief Act of 1997 created the Education IRA as an easy way for modest income families to meet college costs. It's a start, but it's not the entire answer.

Only $500 can be contributed per child, per year, which isn't much, but combined with other savings plans, Education IRAs can be a valuable part of your overall college-savings picture. They offer tax-free distributions that pay for any college-related costs, and earn interest for their intended use until your little one is 30 years old.

One College Education, Please

For the 1998–99 academic year, average prices for undergraduate tuition, room, and board were estimated to be $7,093 at public colleges and $19,410 at private colleges, according to the National Center for Education Statistics.

These number are increasing every year, generally outpacing wage increases, which means that parents are going to have to start saving earlier and earlier for their children's education.

According to the 1997-98 College Board's Annual Survey of Colleges, " ... undergraduates at American colleges will pay, on average, approximately 5 percent more this year than last in tuition and fees at four-year institutions, and from 2 to 4 percent more at two-year institutions."

Factor in, however, what you could receive from an Education IRA funded every year, starting with your child's first, and the picture looks a little less bleak.

The Big Easy

By contributing $500 annually to an Education IRA for 18 years, you could provide $14,769.50 to your child's education by the year 2018*. This amount will most assuredly be helpful in providing college funding, but won't do the entire job.

Somehow, parents and students are going to have to make up the difference.

Read More For Education IRA income and contribution limits, click here.

*Based on these assumptions: estimated 5% return and a 3% annual inflation rate.

We used Strong Management's calculator, but try several — results may vary according to the calculator's required assumptions. To view an array of different investment calculators, click here.

Grants, scholarships, loans, and other tools may be an option when it comes to funding. And, don't forget about work. Today, more than half of the student population works 25 hours a week or more, according to a 2000 Department of Education study, and 30 percent work full time.

Education IRAs can, if used in conjunction with other savings tools, nicely shape up a family's college-funding strategy.

Funding Sources for College

Tailor-Made College Funding

The best thing to do is sit down with a financial planner and research how each of the college-funding plans might work best for your family.

References for a financial planner in your area can be found by contacting The Financial Planning Association.

Your savings plan should be tailored to you perfectly, since there is no perfect savings tool. One plan might include Education IRAs for 18 years, free grant money, and money raised through government loans with attractive interest rates and easily deferred payment plans.

UGMAs can offer an additional source of college money, perhaps to be used for expenses that are not qualified, like a new engine for your student's car or plane tickets home on holidays. Taxable savings can be used as well, although this method is a potentially painful way to fund college, since the money hasn't had the benefit of growth due to tax-deferred compounding.

Education IRA Disadvantages

Besides account limits of $500 and one per child, per year, Education IRAs may present you with other drawbacks.

For example, remember that distributions from Education IRA earnings incur taxes and a 10% penalty if they exceed the education expenses incurred for the year.

Note that The Taxpayer Relief Act doesn't allow you to contribute to an Education IRA if you have adjusted annual income over $95,000 (single filers) or $150,000 (married, filing jointly).

Also, contributions cannot be made to the child once the beneficiary is 18 years old. And, contributions will be phased out as a family's adjusted gross income grows, from $95,000 to $110,000 for single filers, and $150,000 to $160,000 for married filers.

Education IRA Pointers

• Contributions are made with after-tax dollars and are not deductible.
• Annual contributions per year may not exceed $500 from one or multiple donors.
• Contribution amounts are phased out as adjusted gross income increases.
• Contributions are made until a minor turns 18, and can be transferred to another dependent or minor within the same family.
• Qualified distributions are tax free, as long as qualified expenses are equal to or above distributions for the year.
• Using Education IRAs may limit the availability of two potential tax breaks, the Lifetime Learning Credit and Hope Scholarship Credit.

To find out more about the Lifetime Learning Credit or the Hope Scholarship Credit contact the IRS at: http://www.irs.gov/vsearch/iatoc.

To read the IRS' Q&A on Education IRAs, click here.

For further information regarding college funding, click here. This article details how to avoid tapping retirement assets for college expenses.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

Expand College Savings with Education IRAs

By Dianna Doreen
Writer, mPower

In This Story One College Education, Please The Big Easy Funding Sources for College Tailor-Made College Funding Education IRAs Disadvantages Education IRA Pointers

The saving power of an Education IRA is hopelessly outpaced by the skyrocketing cost of putting a child through a four-year college. A $500 contribution per child, per year is all that is allowed. But, this is no reason to scrap them all together.

Education IRAs can take the intimidation factor out of starting to save for college, and can be used in conjunction with other tools to help mitigate the costs of educating your children.

minute: read this article at a glance.

Funding a college education is getting tougher, but it doesn't have to be intimidating.

True, tuition is rising by a few percentage points a year — as are all other related incidentals — and all of this means more financial stress for parents and students.

The Taxpayer Relief Act of 1997 created the Education IRA as an easy way for modest income families to meet college costs. It's a start, but it's not the entire answer.

Only $500 can be contributed per child, per year, which isn't much, but combined with other savings plans, Education IRAs can be a valuable part of your overall college-savings picture. They offer tax-free distributions that pay for any college-related costs, and earn interest for their intended use until your little one is 30 years old.

One College Education, Please

For the 1998–99 academic year, average prices for undergraduate tuition, room, and board were estimated to be $7,093 at public colleges and $19,410 at private colleges, according to the National Center for Education Statistics.

These number are increasing every year, generally outpacing wage increases, which means that parents are going to have to start saving earlier and earlier for their children's education.

According to the 1997-98 College Board's Annual Survey of Colleges, " ... undergraduates at American colleges will pay, on average, approximately 5 percent more this year than last in tuition and fees at four-year institutions, and from 2 to 4 percent more at two-year institutions."

Factor in, however, what you could receive from an Education IRA funded every year, starting with your child's first, and the picture looks a little less bleak.

The Big Easy

By contributing $500 annually to an Education IRA for 18 years, you could provide $14,769.50 to your child's education by the year 2018*. This amount will most assuredly be helpful in providing college funding, but won't do the entire job.

Somehow, parents and students are going to have to make up the difference.

Read More For Education IRA income and contribution limits, click here.

*Based on these assumptions: estimated 5% return and a 3% annual inflation rate.

We used Strong Management's calculator, but try several — results may vary according to the calculator's required assumptions. To view an array of different investment calculators, click here.

Grants, scholarships, loans, and other tools may be an option when it comes to funding. And, don't forget about work. Today, more than half of the student population works 25 hours a week or more, according to a 2000 Department of Education study, and 30 percent work full time.

Education IRAs can, if used in conjunction with other savings tools, nicely shape up a family's college-funding strategy.

Funding Sources for College

Tailor-Made College Funding

The best thing to do is sit down with a financial planner and research how each of the college-funding plans might work best for your family.

References for a financial planner in your area can be found by contacting The Financial Planning Association.

Your savings plan should be tailored to you perfectly, since there is no perfect savings tool. One plan might include Education IRAs for 18 years, free grant money, and money raised through government loans with attractive interest rates and easily deferred payment plans.

UGMAs can offer an additional source of college money, perhaps to be used for expenses that are not qualified, like a new engine for your student's car or plane tickets home on holidays. Taxable savings can be used as well, although this method is a potentially painful way to fund college, since the money hasn't had the benefit of growth due to tax-deferred compounding.

Education IRA Disadvantages

Besides account limits of $500 and one per child, per year, Education IRAs may present you with other drawbacks.

For example, remember that distributions from Education IRA earnings incur taxes and a 10% penalty if they exceed the education expenses incurred for the year.

Note that The Taxpayer Relief Act doesn't allow you to contribute to an Education IRA if you have adjusted annual income over $95,000 (single filers) or $150,000 (married, filing jointly).

Also, contributions cannot be made to the child once the beneficiary is 18 years old. And, contributions will be phased out as a family's adjusted gross income grows, from $95,000 to $110,000 for single filers, and $150,000 to $160,000 for married filers.

Education IRA Pointers

• Contributions are made with after-tax dollars and are not deductible.
• Annual contributions per year may not exceed $500 from one or multiple donors.
• Contribution amounts are phased out as adjusted gross income increases.
• Contributions are made until a minor turns 18, and can be transferred to another dependent or minor within the same family.
• Qualified distributions are tax free, as long as qualified expenses are equal to or above distributions for the year.
• Using Education IRAs may limit the availability of two potential tax breaks, the Lifetime Learning Credit and Hope Scholarship Credit.

To find out more about the Lifetime Learning Credit or the Hope Scholarship Credit contact the IRS at: http://www.irs.gov/vsearch/iatoc.

To read the IRS' Q&A on Education IRAs, click here.

For further information regarding college funding, click here. This article details how to avoid tapping retirement assets for college expenses.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.