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Educational IRA

Are you thinking about opening an educational IRA to help save for your loved ones’ education? This method of savings can be an excellent way to provide for the future if you understand the way they work. Now called the Coverdell ESA, education IRA extends the tax benefits and flexibility of an individual retirement account to another type of essential savings: college accounts.

The first thing most people want to know about the educational IRA is whether they are deductible. The answer is ‘no’. However, because taxes are paid up front, the money withdrawn from the account is tax free. Because many people anticipate earning more money when their child is college aged than they earn when their child is very small, this has the potential to significantly reduce the total amount of money paid in taxes.

With educational IRA, parents can put aside up to $500 per year in a designated account for that child’s post secondary education. Although the money is not tax deductible, it will grow untaxed in the account and can be withdrawn without paying taxes as well. This can save thousands of money for people who anticipate high education costs for their children. High earning couples are not eligible for this opportunity.

Money that is invested in an education IRA can be invested in a variety of places. The investor can decide what type of investment makes them the most comfortable, including stocks, bonds, mutual funds, money market accounts, and any other type of investment allowed in a traditional retirement IRA.

What can the educational IRA cover? The money from this account can be used to fund almost any aspect of college education expenses, including tuition, room and board, books, supplies, and related fees. $500 per year can add up to a substantial amount of money, especially when compounding interest is added into the equation.

The name ‘IRA’ itself is deceptive. Although these accounts are run similarly to the individual retirement accounts for which they are named, they are strictly intended for post secondary education. This is why the government is transitioning the name of the account to Coverdell ESA, with ESA standing for ‘educational savings account’.

If you are looking for a way to put aside money for your children’s future, the IRA is a great choice. The money will build up quickly, especially if invested early in the life of the child who is to be educated. Money that grows tax free is sure to grow quickly, and paying the taxes up front means that your child will be able to use every penny of their savings toward the college education they need to be competitive in this world.

If you have not opened up an education IRA for a child in your life, there is always time. An IRA is more than just the gift of money; it is the gift of education, knowledge, and a career. Any financial advisor will be able to tell you more about how the IRA can make all the difference in the life of a child you love.

Educational IRA
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