Roth IRA And Traditional IRA Accounts

Undoubtedly, the star of the Taxpayer Relief Act of 2006 (TRA06) has been the Roth IRA. Even other major tax bill items, such as capital gains reform, seemed unable to match the Roth IRA in publicity generated, both in financial and general interest media. Magazines, newspapers, TV, and radio all turned out in force to laud the Roth IRA.

Waiting in the wings, well out of the spotlight, has been another creation of TRA-06, the Education IRA. Like a supporting actor receiving a bare minimum of critics' and audiences' attention, the Education IRA limits have remained largely unsung.

But the Education IRA's relative anonymity may change with time, despite limits that might make it seem less attractive to savers than the Roth or Traditional IRA, and the comparatively slow rate at which Education IRA guidance has been provided. In spite of apparent limitations, the Education IRA is being offered by fifty-six percent of depository financial organizations surveyed by The IRA Reporter, Universal Pensions, Inc.'s (UPI) IRA industry newsletter. And, still more are considering offering the Education IRA.

While similar in tax treatment to the nondeductible-contribution Roth IRA, the Education IRA was created not for retirement, but instead to allow taxpayers to save for children's educations, with contributions allowed until a beneficiary's 18th birthday. Provisions of the Education IRA include the following:

Contribution limits, eligibility-Up to $ 500 per year may be contributed to Education IRAs on behalf of each designated beneficiary (child/student). However, individuals with incomes from $ 95,000 to $ 110,000, and couples with joint incomes from $ 150,000 to $ 160,000, have reduced contribution limits. Above these income ranges no contributions may be made. No earned income is required in order to make an Education IRA contribution, thus retired persons-such as grandparents -may make contributions. Tax treatment-Contributions to Education IRAs are not deductible, but distributions (if used for qualified education expenses) are tax-free.

Qualified education expenses- These generally include post-secondary education expenses for tuition, books, supplies, equipment, and room and board (the latter only if the beneficiary is enrolled on at least a half-time basis). Qualified expenses may also include the cost of vocational or technical training. One of the primary reasons for the overshadowing of the Education IRA appears to be its smaller annual contribution limit, a $500 per student/beneficiary maximum compared to the per-contributor $2,000 maximum for a Roth IRA (or Traditional IRA). In the IRA Reporter survey, 85 percent of financial organizations not immediately offering the Education IRA cited this fact as the primary reason for the decision. Also cited was the seeming shortage of guidance on certain operations and reporting issues.

Despite some hesitancy, the Education IRA has very real benefits, and-as learned in The IRA Reporter survey-some strong supporters. Important to note is that Education IRA contributions can be made in addition to a Roth or Traditional IRA contribution. Furthermore, the $ 500-per-beneficiary annual maximum may be contributed on behalf of an unlimited number of student beneficiaries. Thus, when total contribution potential is considered, annual aggregate Education IRA contributions made by a taxpayer could equal or exceed Roth IRA or Traditional IRA contributions for a given tax year.

Education IRA