Room and board if the designated beneficiary is at least a half-time student at an eligible educational institution. A student is enrolled at least half-time if he or she is enrolled for at least half the full-time academic workload for the course of study the student is pursuing as determined under the standards of the institution where the student is enrolled. Room and board is limited to:
a. The school's posted room and board charge for students living on-campus, or
b. $2,500 each year for students living off-campus and not at home.
Eligible educational institution. This is any college, university, vocational school, or other postsecondary educational institution eligible to participate in the student aid programs administered by the Department of Education. It includes virtually any accredited public, nonprofit, or proprietary (privately owned profit-making) postsecondary institution.
Who Can Contribute to an Education IRA?
Any individual (including the designated beneficiary) can contribute to a child's education IRA if the individual's modified adjusted gross income (discussed later) for the tax year is less than $110,000 ($160,000 for married taxpayers filing jointly).
Contributions can be made to one or several education IRAs for the same child provided that the total contributions are not more than the contribution limit (defined later) for a tax year.
Qualified state tuition program. No contributions can be made to an education IRA on behalf of a beneficiary if any amount is contributed during the tax year to a qualified state tuition program on behalf of the same beneficiary.
Contribution Limits
The maximum total contribution for each designated beneficiary (child) is $2000 for a tax year. This includes contributions to all the child's education IRAs from all sources other than rollovers. See Can Education IRA Assets Be Moved?, later.
Reduced Limit for Certain Contributors
If your modified adjusted gross income (defined later) is between $95,000 and $110,000 (between $150,000 and $160,000 for married taxpayers filing jointly), the $2000 maximum contribution for each child is gradually reduced (see Figuring the limit, next). If your modified adjusted income is $110,000 or more ($160,000 or more for married taxpayers filing jointly), you cannot contribute to anyone's education IRA.
Figuring the limit. To figure the limit, multiply $2000 by a fraction. The numerator (top number) is your modified adjusted gross income (defined later) minus $95,000 ($150,000 in the case of a joint return). The denominator (bottom number) is $15,000 ($10,000 in the case of a joint return). Subtract the result from $2000. This is the amount you can deduct.
Example. Paul, a single individual, had modified adjusted gross income of $96,500 for the year. For Paul, the maximum contribution for each child is reduced to $1800, figured as follows.
1. $96,500 - $95,000 = $1,500
2. $1,500 ÷ $15,000 = 10%
3. 10% × $2000 = $200
4. $2000 - $200 = $1800
Modified adjusted gross income. Your modified adjusted gross income for the purpose of determining the contribution limit is the adjusted gross income shown on your return, increased by the following exclusions from your income.
1. Foreign earned income of U.S. citizens or residents living abroad.
2. Housing costs of U.S. citizens or residents living abroad.
3. Income from sources within:
1. Puerto Rico,
2. Guam,
3. American Samoa, or
4. The Northern Mariana Islands.
Additional Tax on Excess Contributions
A 6% excise tax applies each year to excess contributions made to an education IRA on behalf of a designated beneficiary. Excess contributions include the following amounts.
1. Contributions that are more than the contribution limit (the smaller of $2000 or the reduced limit for certain contributors, discussed earlier).
2. Contributions to the account, if any amount is also contributed to a qualified state tuition program on behalf of the same child in the same tax year. The excise tax will not apply, however, if funds were withdrawn from the education IRA to be contributed to the qualified state tuition program.
3. Excess contributions for the preceding year, reduced by the total of the following:
a. Withdrawals (other than those rolled over as discussed later) made during the year, and
b. The contribution limit for the current year minus the amount contributed for the current year.
Exceptions. The excise tax does not apply if the excess contributions (and any earnings on them) are withdrawn before the due date of the beneficiary's tax return for the year (including extensions). If the beneficiary does not have to file a return for the year, the tax does not apply if the excess contributions (and the earnings on them) are withdrawn by April 15 of the year following the year the contributions are made. The withdrawn earnings must be included in the beneficiary's income for the year in which the excess contribution is made.
The excise tax also does not apply to any rollover contribution.
Other Contribution Rules
You can contribute only cash to an education IRA. You cannot contribute to an education IRA after the beneficiary reaches his or her 18th birthday.
Can Education IRA Assets Be Moved?
You can roll over assets from one education IRA to another. You can also change the designated beneficiary's interest to a spouse or former spouse.
ROLLOVERS
Any amount withdrawn from an education IRA and rolled over to another education IRA for the benefit of the same designated beneficiary or certain members of the designated beneficiary's family is not taxable. This rule applies only if the beneficiary of the new IRA is under age 30 on the date of the rollover contribution to the new IRA.
An amount is rolled over if it is paid to another education IRA within 60 days after the date of the withdrawal.
Members of the beneficiary's family. The beneficiary's spouse and the following individuals (and their spouses) are members of the designated beneficiary's family.
1. The beneficiary's child, grandchild, or stepchild.
2. A brother, sister, stepbrother, or stepsister of the beneficiary.
3. A son or daughter of the beneficiary's brother or sister.
4. The father, mother, grandfather, grandmother, stepfather, or stepmother of the beneficiary.
5. A brother or sister of the beneficiary's father or mother.
6. The beneficiary's son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.
Only one rollover per education IRA is allowed during a 12-month period ending on the date of the payment or distribution.
Changing the designated beneficiary.The designated beneficiary can be changed to certain members of the beneficiary's family (listed earlier). There are no income tax consequences if, at the time of the change, the new beneficiary is under age 30.
Transfer because of divorce. The transfer of a designated beneficiary's interest in an education IRA to his or her spouse or former spouse under a divorce or separation instrument is not a taxable transfer. After the transfer, the interest will be treated as an education IRA in which the spouse or former spouse is the designated beneficiary.
ARE WITHDRAWALS FROM AN EDUCATION IRA TAXABLE?
The designated beneficiary of an education IRA can take withdrawals at any time. But, see When Must Education IRA Assets Be Distributed?, later. Withdrawals for the designated beneficiary's qualified higher education expenses during the year are generally tax -free.
What Determines the Tax Treatment of Withdrawals?
The tax treatment of distributions (withdrawals) from an education IRA depends, in part, on the qualified higher education expenses that a designated beneficiary has in a tax year.
Distribution Not More Than Expenses
Generally, a withdrawal is tax free if it is not more than the designated beneficiary's qualified higher education expenses in a tax year.
Distribution More Than Expenses
Generally, if the total withdrawals for a tax year are more than the qualified higher education expenses, a portion of the amount withdrawn is taxable to the beneficiary.
The taxable portion is the amount that represents earnings that have accumulated tax free in the account. Figure the taxable amount as shown in the following steps.
1. Multiply the amount withdrawn by a fraction, the numerator (top number) of which is the total contributions in the account and the denominator (bottom number) of which is the total balance in the account before the withdrawal(s).
2. Subtract the amount figured in (1) from the total amount withdrawn during the year. This is the amount of earnings included in the withdrawal(s).
3. Multiply the amount of earnings figured in (2) by a fraction, the numerator of which is the qualified higher education expenses paid during the year and the denominator of which is the total amount withdrawn during the year.
4. Subtract the amount figured in (3) from the amount figured in (2). This is the amount the beneficiary must include in income.
Example. You receive a $6,000 distribution from an education IRA to which $10,000 has been contributed. The balance in the IRA before the withdrawal was $12,000. You had $4,500 of qualified higher education expenses for the year. Using the steps above, you figure the taxable portion of your withdrawal as follows.
1. $6,000 × 10000/12000 = $5,000
2. $6,000 - $5,000 = $1,000
3. $1,000 × 4500/6000 = $750
4. $1,000 - $750 = $250
You must include $250 in income as withdrawn earnings not used for the expenses of higher education.
Waiver of tax-free treatment. The student may waive the tax-free treatment of the education IRA distribution and elect to pay any tax that would otherwise be owed on the distribution. The student or the student's parents may then be eligible to claim a Hope credit or lifetime learning credit for qualified higher education expenses paid in that tax year.
Additional tax. Generally, if you receive a taxable distribution, you must pay a 10% additional tax on the amount included in income.
Exceptions. The 10% additional tax does not apply to distributions that are:
1. Made to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary,
2. Made because the designated beneficiary is disabled (defined later),
3. Made because the designated beneficiary received a qualified scholarship excludable from gross income, an educational assistance allowance, or payment for the designated beneficiary's educational expenses that is excludable from gross income under any law of the United States to the extent the distribution is not more than the scholarship, allowance, or payment, or
4. Included in income only because the student waived the tax-free treatment of the withdrawal as discussed earlier.
The 10% additional tax also does not apply to a distribution that is a return of an excess contribution. For the additional tax not to apply, the distribution must be made before the due date of the contributor's tax return (including extensions) and it must include any net income attributable to that contribution. That net income also must be included in the contributor's gross income for the tax year the contribution was made. If the beneficiary does not have to file a return, the excess contribution (and any earnings attributable to it) must be withdrawn by April 15 of the year following the year of the contribution.
Disabled. You are considered to be disabled if you show proof that you cannot do any substantial gainful activity because of your physical or mental condition. A physician must determine that your condition can be expected to result in death or to be of long-continued and indefinite duration.
When Must Education IRA Assets Be Distributed?
Generally, any assets remaining in the education IRA must be withdrawn or distributed when either one of the following two events occurs.
1. The designated beneficiary reaches age 30. In this case, the designated beneficiary must withdraw the remaining assets within 30 days after he or she reaches age 30.
2. The designated beneficiary dies before reaching age 30. In this case, the remaining assets must generally be distributed. The assets must be distributed to the estate of the designated beneficiary (if no beneficary is named) or to the beneficiary named by the designated beneficiary (if not a spouse or other family member) within 30 days after the date of death.
When distribution is required because of one of these events, any balance remaining at the close of the 30-day period is deemed to be distributed at that time and the earnings portion of the distribution is includable in the beneficiary's gross income. For distributions made because the designated beneficiary reaches age 30, the designated beneficiary may be subject to an additional 10% tax on the portion of the amount withdrawn that represents earnings if the designated beneficiary does not have any qualified higher education expenses in the same taxable year he or she makes the withdrawal. To determine the earnings on the amount withdrawn, use the following two steps.
1. Multiply the amount withdrawn by a fraction. The numerator is the total contributions in the account and the denominator is the total balance in the account before the withdrawal(s).
2. Subtract the amount figured in (1) from the total amount withdrawn during the year. The result is the amount of earnings included in the withdrawal. The beneficiary must include this amount in income.
Exception for transfer to surviving spouse or family member. There are no income tax consequences if amounts that are required to be distributed are transferred or rolled over in the following situations.
1. Before a designated beneficiary reaches age 30, the remaining balance in his or her education IRA may be transferred or rolled over to another education IRA for a member of the designated beneficiary's family (defined earlier). The new designated beneficiary must be under age 30 at the time of the transfer or rollover.
2. In the event of a designated beneficiary's death, a spouse or family member acquires the former designated beneficiary's interest in an education IRA as a result of the death of the designated beneficiary. The spouse or family member can treat the education IRA as his or her own
