| Coverdell IRA's (by Yahoo) |
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Created under the Taxpayer Relief
Act of 1997, Education IRAs are not retirement accounts, but
rather special educational savings accounts. While contributions
to these accounts (up to $500 for 2001, per child under age 18)
are not tax deductible, any withdrawals used for post-secondary
education will be totally tax-free. While there are income
limits that affect your ability to contribute to such an account
(for 2001, this benefit phases out between $150,000 and $160,000
for married couples filing jointly, and between $95,000 and
$110,000 for others), the law does not specify that
contributions must be made by the beneficiary's parents. Other
relatives or even friends who fall below the income cutoffs
could presumably contribute. However, no child can receive more
than $500 in deposits to an Education IRA in 2001.
But before you rush to fund an Education IRA, you should realize that under the federal aid formulas, an Education IRA is considered an asset of the owner of the account. Since the tax law refers to the student as the account holder, these accounts are considered a student asset that will be assessed at the 35% financial aid assessment rate. The untaxed investment income generated by an Education IRA during a base income year will also be counted as part of the student's untaxed income. Under the institutional methodology, the College Board will consider these funds as a parent asset. The investment income from an Education IRA will not be considered part of the 2001 base year income that must be reported on the 2002-2003 version of the PROFILE. Also, for 2001 contributions to and withdrawals from Education IRAs can eliminate your ability to claim other more substantial educational benefits that are part of the Taxpayer Relief Act of 1997. At the present time, it seems that Education IRAs are only appropriate for upperincome families who are absolutely certain they will not qualify for financial aid. Note: The new tax bill signed into law in June 2001 will result in a number of changes involving Education IRAs starting in 2002.
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