Most high school graduates are pretty much on their own when it comes to furthering their education, since parents are not able to help due to the increased cost of living throughout the United States. This was usually the case until just recently, when many different programs were developed for aspiring college students to make their dreams come true. Because not all students qualify for financial aid and other programs, they are left to cover the entire cost of their education, including books, lab fees, and living costs.
One program that was recently developed is the Education IRA, which works just like a retirement IRA. IRAs are meant to help people save up for a certain event in their life, like retirement or college education. The Education IRA is meant to help students save up for their college education, unlike other programs, which only offer tax incentives for high education expenses.
An Education IRA is a tax-advantaged saving account program that was created in 1997 by the Taxpayer Relief Act. Anyone is able to contribute to an Education IRA, whether related to the account beneficiary or not. There is a $2,000 maximum limit to an Education IRA, as long as the parent’s earned income is under $190,000. Families with smaller incomes are able to make smaller contributions to the account, and individual filers are also granted the same option for contribution.
An Education IRA is very similar to a Roth IRA, since after-tax money is sheltered in an account to save up for a certain event. The money in the account will remain tax-free as long as all the money will go to education costs only. By setting a savings account up for education costs, a great amount of money can be made by the time a child is ready to continue their education. Education IRAs are best when they are started when the child is young, so they will have many years of built up interest to use for the child’s education.
An Education IRA is a very effective method when trying to get money to put a child through college, since it is earned money rather than a loan. Because all of the money earned on an Education IRA is actually earned and not loaned, there will be no payments to pay back any costs of education. Education loans carry high interest rates and can take years to pay off, but Education IRAs can cover all of the costs without having to pay anything back.
Setting up an education IRA for children is very important, because it gives them a chance to go to college and pursue any dream they wish. With the costs of college education rising, it is important to have a plan to put a child through school while they are still young, until waiting until the last minute and having to take out loans or refinancing homes.
It is not necessary to contribute the entire $2,000 each year for each student, and you actually can choose not to make any contributions in a given year. You can contribute to the account each year until the child reaches eighteen years of age, with the exception of special needs children who can receive contributions after their eighteenth birthday. If funds remain in the Education IRA account after the school is paid for, it is subject to taxes and penalties that are determined by the bank. Unlike most other IRA accounts, Education IRA accounts allow you to withdraw money at any time. It is up to the account holder to make sure the funds are going toward education only, since this is what is outlined in an Education IRA.