|
In 1997 Congress passed the Taxpayer Relief Act which, among other things, ushered in the concept of the Educational IRA. This plan created a new type of tax favored IRA designed to be used by investors whose goal is to save for a child's educational future.
In June of 2001, Congress expanded these plans through the The Economic Growth & Tax Relief Reconciliation Act.
Contribution Limits
Currently, investors can contribute up to $2,000.00 per year, per beneficiary. These contributions may be made until which the time the beneficiary turns 18 years of age.
Example: Let's say we have one beneficiary - grandchild Tommy - Tommy has 2 sets of grandparents. The maximum that all four (4) could contribute would be $500.00 each. On the other hand, one grandparent could contribute the entire $2,000 - but that would then be the maximum allowance for Tommy.
Again, contributions of up to $2,000 apply to EACH beneficiary.
Tax Free Growth - Tax Free Distribution
Contributions to Educational IRA's are made with after tax monies. These monies accumulate and compound tax free and distibute federally tax-free providing the funds are being used to pay for qualified, higher educational expenses or other eligible expenses.
If these funds are not used before the 30th birthday of the beneficiary, the assets continue to grow tax free, but distributions after age 30 are fully taxable AND, if the beneficiary is under 59 1/2, there's a 10% IRS-imposed penalty (similar to an annuity of regular IRA).
The contribution amounts are phased out for individual taxpayers with AGI's above $95,000 and $150,000 for joint returns.
The Better News:
Starting in the year 2002, the contribution deadline will now extend to April 15 (of year following the year for which contribution is being made - similar to a regular IRA). There are other new provisions scheduled to be phased in come 2002. See how the "old law' compares to the new law below:
Feature |
Old Law |
New Law |
Annual Contribution limit per beneficiary |
$500 |
$2,000 |
AGI phase out ranges (single filers) |
$95,000 - $110,000 |
$95,000 - $110,000 |
AGI phase-out ranges (joint filers) |
$150,000 - $160,000 |
$190,000 - $220,000 |
Contribution Deadline |
December 31st |
April 15th (for year passed) |
Age Restriction |
18 |
18 and beyond (special needs) |
Contributors |
Anyone who meets AGI's |
Anyone who meets AGI's |
Corporations and tax exempt orgs. |
||
Definition of Qualified Expenses |
Tuition, books, supplies, |
Expanded to include tutoring, |
equipment, room and board. |
special needs, uniforms, |
|
transportation, purchase of |
||
computer technology, educational |
||
software, secondary school |
||
expenses (k-12), etc. |
Let's examine what the increases in contribution allowances could mean to you and your family in dollars and cents:
The hypothetical chart below illustrates a contribution of $2,000 for 18 years, versus $500 over the same period of time. The rate return (not guaranteed) assumes 8.0%. This, of course, does not represent any specific investment.
As you can see, you could accumulate almost $61,000 more under the new law than if you were limited to the $500 per year.
Action
To Take If you would like to learn more about Educational IRA's, please click HERE.
|
FOR FASTER, PERSONALIZED SERVICE CALL 1-800-480-7526
If you have not registered yourself, please do so now. Registered users will be added to our exclusive BROADCAST E-MAIL LIST, which provides periodic electronic communiqués on the subject of new offerings, cutting-edge investing ideas and newly developed estate preservation strategies.
(Please note: your registration information will not be released to any
other party without your express written consent)
Copyright © 1998
Fielder Financial Management, LTD.
All Rights Reserved.
Securities are offered through Girard Securities, Inc.
member FINRA, SIPC.
Mark R. Fielder, Registered Principal. CA. Insurance Lic. # 0690576.
