Regulations For Education IRAsWhen Carl and Kaylene Hamke look at their twin 2-year-old daughters, they see more than just two bundles of joy. Haley and Katherine also represent $ 180,000 worth of college tuition bills down the road. To begin to whittle down that towering expense, the Hamkes are going to immediately start putting away college funds for each daughter in a new education IRA rules. The accounts became available this month thanks to federal tax law changes. They allow parents, grandparents or others to plunk $ 500 a year into a tax-free investment account for a child. The contributions can continue until the child reaches age 18. Neither the parents nor the child owe taxes on gains the account earns, so long as the money is spent on education. But no more than $ 500 can be set aside in these accounts for any child in any year. Investment industry experts say the education IRA alone is not likely to grow large enough to cover all the costs of a college education. According to a recent report by the College Board, which researches education issues, the average tuition and fees at public colleges averaged $ 7,142 a year in 2006-07; at private colleges, the annual cost reached $ 18,357. Even so, the education IRAs represents a new savings option for families. College financial-aid officials say families straining from the cost of educating their children will welcome the new IRA. "It would help out a majority of our parents," said the director of financial aid at Rockhurst College in Kansas City, Mo. Eligible to make the $ 500 contribution are single persons with incomes under $ 95,000 and married couples with income below $ 150,000. Those with higher incomes face lower contribution limits or may not have access to the new accounts. Unlike traditional IRAs, contributions to an education IRA are not tax- deductible. All the earnings of an education IRA are tax-free if the money is used to finance college or other education. If not used for an education, the earnings are taxed and incur a 10 percent penalty. The funds must be tapped before the recipient turns 30. Already, there is speculation that pressure will be brought to get Congress to expand the sum that can be annually contributed to an education IRA. Chris Wloszczyna of the Investment Company Institute, which represents mutual funds, said the $ 500 limit �in itself reduces the potential attractiveness to anybody.� Congress was reluctant to go beyond the $ 500 limit at the same time it is introducing another investment retirement account, called a Roth IRA, because both accounts will slice into federal income tax receipts. A Roth IRA does not provide an immediate tax deduction but allows retirement fund earnings to grow untaxed and ultimately be withdrawn upon retirement _ also without incurring a tax. Area banks are gearing up to provide customers information about education IRAs. The vice president of Midland Bank in Lee's Summit, Mo., said: �We are looking forward to it. It is going to be a great benefit.� A family that regularly invests $ 500 a year in an education IRA certificate of deposit bearing an interest rate of, say, 6 percent would amass $ 14,000 over 18 years, Dehner said. While that is unlikely to cover the total cost of a college education, Dehner said, �that's better than nothing.� |