LOISELLE, GOODWIN & HINDS
CERTIFIED PUBLIC ACCOUNTANTS

Education IRAs

This is to advise you of a new tax break for people looking for a good way to save for future education expenses: the "education individual retirement account." The tax break from this new education IRA comes in the fact that, although there is no upfront deduction, distributions from the accounts are not subject to federal income tax to the extent that they are used to pay qualified higher education expenses (such as tuition, fees, books and room and board) of the education IRA beneficiary.

If the qualified higher education expenses of the beneficiary for the year are at least equal to the total amount of the distribution (i.e., principal and earnings combined) from an education IRA, then the earnings are completely tax-free. However, if the beneficiary's higher education expenses are less than the total amount of the distribution, then the qualified higher education expenses are deemed to be paid from a pro-rata share of both the principal and earnings components of the distribution. In that case, the principal portion of the distribution is entirely tax-free, and part of the earnings is excludable.

Contributions to an education investment account may be made only in cash and may not be made after the beneficiary reaches age 18. And annual contributions are limited to $500 per beneficiary. Contributions above that amount generally are subject to a penalty.

A 10% penalty is imposed on the taxable portion of a distribution from an education IRA that is not made on account of the death, disability, or scholarship received by the beneficiary. Tax-free transfers or rollovers of account balances from one education IRA benefiting one beneficiary to another account benefiting another beneficiary (as well as redesignations of the named beneficiary) are allowed, provided that the new beneficiary is a member of the family of the old beneficiary.

Contributions to education IRAs are considered taxable gifts for gift tax purposes, but are eligible for the $10,000 per donee gift tax exclusion.

Please contact us if you have any questions or wish to discuss the above rules further. Of course, we would also be happy to discuss the whole range or planning options to fund your college tuition needs.

(04/16/98)

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Last modified: July 09, 1999