Education IRAs

The new tax bill provides yet another option to save for college expenses: the "education IRA’s". While not technically an individual retirement account, families can contribute up to $500 per year beginning in 1998 for each child under age 18 into these savings plans. The contributions aren’t tax deductible, but the money isn’t taxed so long as it’s used for specified education expenses such as tuition and books. Students who are enrolled at least half time can use the accounts to pay for room and board. Both full-time and part time students are eligible for these savings accounts. If the balance of the education IRA isn’t used by the time the student reaches 30, it must be withdrawn or "distributed". At this point, the funds would be taxed and subject to a 10% penalty. This can be avoided if the balance is rolled over to another education IRA to benefit another family member.

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