Education IRA

In this article we will be discussing Education IRA. Eric Strickland practices what he preaches. As a chartered financial planner for Betts, Strickland & Monroe, he recommends clients invest $500 a year in educational IRA to save for their children’s college education.

So when son Gavin was born in December, Strickland made sure to open up an account to save for his child’s college education. I “I keep telling my clients to do it” he said. “So I thought I should do it myself.”

In 2006, both the federal and state governments introduced new programs designed to encourage parents to save for a child’s education. Both offer a chance to sock away money that will earn tax-free interest and dividends. Experts warn, however, that how suitable a savings program is for you and your family varies.

The federal program allows investors to put away up to $500 per child, per year, until the child turns 18, said Grace R. Ghezzi, a certified financial planner with Green & Seifter. You pay no tax on what the money earns, nor do you pay tax on withdrawals, so long as the money is used for qualified educational purposes.

“Obviously, with a limit of $500 a year, you are not going to accumulate a ton of money in the account,” she said. “But the good side is that whatever you do accumulate comes out tax-free.” That’s what Strickland finds attractive about the plan. “This is one of the few ways you can save for a college education and not pay taxes on that money,” he said. “There’s a potential for a nice return.”

Money can be used for any purpose – tuition, books, meals or rooms – so long as you are going to school at least half-time, Ghezzi said. That means if your child gets a full scholarship, the money can still be used to cover other expenses.

“Room and board can be a big chunk of money,” she said. “So it’s nice that you can use this method of funding it.”

Ghezzi said another nice feature of the accounts is that anyone can fund one. That means grandparents and others who may wish to give a child a gift of money can deposit right into the account and watch the value of their gift increase by having it grow tax-free. The tax-free aspect of the account is only available to taxpayers filing jointly with incomes of less than $150,000, Ghezzi said. The benefit phases out for those earning between $150,000 and $160,000 and is eliminated completely for those earning more than $160,000.

“I think these accounts work best for someone who has a child who is rather young,” she said. “Again, you need to be aware of the need to save in other ways because of the $500 cap on this fund, but I think that anytime you can get tax-free income you really need to consider it.”

With a limit of $500 year, Ghezzi said you need to make sure account fees for managing the educational IRA don’t wipe out the tax benefit.