Taxable Savings And IRA Accounts

In the face of criticism that the current maximum annual contribution benefit is too low, a look at the numbers reveals a less gloomy picture. Admittedly, for parents whose children are already in their teens, the benefits are limited. But consider the potential for beneficiaries who are very young, as demonstrated below.

If the current annual Education IRA S contribution limits remains at $ 500, during the period from birth to age 18 a total of $ 9,000 may be contributed. As the accompanying table shows, this could-with a modest earnings rate of eight percent, or a very possible rate of 12 percent over 18 years-result in Education IRA savings that greatly outperform savings placed in a taxable savings account.

In the above examples, Education IRA assets clearly outperform those in a taxable savings account, e.g., 24 percent greater at an eight percent earnings rate, and 40 percent greater at a 12 percent earnings rate.

Either of the examples could pay for an entire year-or more-of education-at many of the country's leading colleges. At more modestly priced post-secondary institutions, these amounts could take a much more meaningful bite out of education expenses.

Education IRA may get even better. Another factor to be considered in the Education IRA picture is the possibility that Education IRA provisions could be enhanced to make these arrangements much more attractive to savers. Evidence for this expectation is found in the vocal and well-organized support for the Education IRA in recent congressional sessions, coupled with the fact that finding ways to make higher education affordable is a high priority among a very large and growing segment of American taxpayers.

As of this writing (late April) legislation pending in Congress proposed an increase in annual contribution limits, and provided other enhancements that would be popular with prospective Education IRA holders. The House of Representatives passed Education IRA enhancement legislation in late 1997, and the Senate was preparing to consider similar legislation as of this writing. Some of the more notable and attractive provisions proposed in current and recent congressional sessions include:

* raising the $ 500 per-beneficiary contribution limit from $ 500 to $ 2,000$ 2,500,

* allowing K-12 expenses to be considered "qualifying education expenses," and

* allowing businesses (or other such entities) to make Education IRA contributions.

Even if no Education IRA enhancements are forthcoming in the current congressional session, or even under this administration, the seed has been planted, and support for retaining and enhancing the Education IRA seems strong among many legislators. And, as is demonstrated, even as currently structured these arrangements are capable of delivering a tax-advantaged saving benefit to an Education IRA beneficiary.

Education IRA