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Retirement Planning

Educational IRA (Coverdell ESA)


An Educational IRA is a trust or custodial account that is created for the purpose of paying the qualified higher education expenses of the designated beneficiary of the account. The account must be designated as an Education IRA when it is created in order to be treated as an Education IRA for tax purposes.

Eligibility
An Educational IRA may be established for the benefit of any child under age 18. Contributions will not be accepted after the child reaches his/her 18th birthday.

Contributions
Parents, grandparents, other family member, friends, and a child himself/herself may contribute to the child's Educational IRA, provided that the total contribution for the child during the taxable year does not exceed the $2,000 limit. Contributions do not count against the the limits for IRAs.

Deductibility
Contributions are not tax-deductible.

Tax Benefits
Amounts deposited in the account grow tax-free until distributed, and the child will not owe tax on any withdrawal from the account if the child's qualified higher education expenses in a taxable year at an eligible educational institution for the year equal or exceed the amount of the withdrawal.

Withdrawals
Generally, the withdrawals are tax-free to the designated beneficiary to the extent the amount of the withdrawal does not exceed the designated beneficiaries qualified higher education expenses. "Qualified higher education expenses" mean expenses for tuition, fees, books, supplies, room and board (generally the school posted room and board charges, or $2,500 per year for students living off-campus and not at home) and equipment required for the enrollment or attendance of the designated beneficiary at an eligible educational institution.

If there are assets remaining in an educational IRA after the designated beneficiary finishes his/ her post-secondary education, the amount left in the account may be withdrawn by the designated beneficiary. The designated beneficiary will be subject to income tax and an additional 10% tax on the portion of the amount withdrawn that represents earnings. Alternatively, if the designated beneficiary's Educational IRA is rolled over to another Educational IRA for the benefit of a member of the designated beneficiary's family, the amount rolled over will not be taxable.

 
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