IRS can help you save for college

If you're thinking about ways to fund your child's education, consider a

tax-free option that the Internal Revenue Serivce has provided since 1998.

The IRS offers an incentive for parents to save money tax-free for certain

higher education expenses, subject to limits based on adjusted gross income.

This advantage is in addition to the $2,000 personal Individual Retirement

Account contribution you and your spouse may make each year.

You (or anyone who wishes) can contribute up to a maximum of $500 per

child per year before the child reaches age 18. A donor can be a parent,

uncle, cousin, grandparent, etc.

The child is the beneficiary of the account, and there is no limit on

the number of accounts that can be held in a child's name or the number

of people who may make contributions, as long as the total contributions

each year in the child's name does not exceed the $500 limit. Education

IRAs permit tax-free withdrawals for education expenses such as tuition,

books and supplies.

Like a Roth IRA, contributions are not tax-deductible, but accumulations

and withdrawals are tax-free as long as the guidelines governing Education

IRAs are met — that is, the money is spent for appropriate education expenses,

and withdrawals are completed before the beneficiary reaches age 30. The

accumulated amount may be used tax-free to pay for more than just tuition;

it also can be used for books, supplies, and room and board (for full-time

students).

Certain restrictions apply. Education IRAs are subject to the same income

limits as Roth IRAs: $95,000 for single taxpayers and $150,000 for married

taxpayers filing jointly. Unlike some other types of accounts established

for children, the person who funds an Education IRA retains control over

the account.

The money in an Education IRA must be spent or paid to the beneficiary

before his or her 30th birthday. Alternatively, if the designated child

does not attend college and the money is not used by the time he or she

turns 30, the account's value may be rolled over into a new Education IRA

for another member of the family under age 30.

Withdrawals of earnings that are not for educational expenses as defined

by the IRS may be subject to both income taxes and a 10 percent penalty.

Also, no contribution can be made to an Education IRA on behalf of a child

if any amount is contributed for that child during the tax year through

a qualified state tuition plan.

Considering the ever-increasing cost of college education, an Education

IRA could form a valuable part of your education funding strategy. However,

because of the tax implications involved, it's best to discuss your goals

and objectives with a certified financial planner before setting up an account.

—Zall, Bureaucratus columnist and a retired federal employee, is a freelance

writer based in Silver Spring, Md. He specializes in taxes, investing, business

and government workplace issues. He is a certified internal auditor and

a registered investment adviser. He can be reached at miltzall@starpower.net.