What is an Education IRA?

Answer:
While the term conjures up images of retirement accounts

for education, an educational IRA isn’t the same type of instrument. Yes, you can save money for the future through contributions just as you would with an IRA but the education IRA works a bit differently than traditional retirement accounts.

The educational IRA is a type of custodial account held at a bank or institution with the sole purpose of accumulating funds to pay the higher education expenses of the named beneficiary.

Like IRAs, these accounts have contribution limits. The contribution limit each year is $500 except for qualified rollovers. This small amount makes education IRAs fairly limited in how much they can grow. The earnings accumulate tax free so long as withdrawals go toward paying the higher education expenses of the beneficiary.

If the money is not used for higher education, income tax is due on the earnings and a 10% penalty applies. In addition, the beneficiary must use the earnings within thirty days after he or she turns thirty years old or else he or she will be penalized and taxed.

Educational IRAs have provisions that allow for designating another family member as the beneficiary should the designated beneficiary not need the funds.


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