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education, that $500 limit was pretty paltry. However, with the change in the law, the new limit is $2000 per year, which is more reasonable. Unlike traditional and Roth IRAs, the person benefiting from the edu- cation IRA doesn’t need to have any earnings. This works especially well if the education IRA is for a child whose parents have been phased out from being able to contribute.

There are limitations to the amount of income the donor can earn and still make contributions. For those who file as single on their taxes, they can have a maximum adjusted gross income of between $95,000 and $110,000 until the ability to contribute is completely phased out. For those filing as married, the maximum adjusted gross income is now between $190,000 and $220,000 (double the limita- tions for single filers) before the contribution is phased out. There- fore, for families who want to make contributions to education IRAs but fall outside the AGI limits and are ineligible to make contribu- tions, it makes sense to encourage the children to make contribu- tions. Also, any contribution to an education IRA is not counted with any traditional or Roth IRA contributions. They are considered to be completely separate.

Contributions to education IRAs are done on an after-tax basis and cannot be deducted on your federal income tax return. The money will grow tax-deferred and then all qualified distributions will be tax-free. In the past, the only distributions that qualified to be tax-free were any postsecondary tuition costs, fees, books, supplies, and equipment. In addition to those, this year, the government has added many other types of qualifying expenses. Now, the definition includes expenses from elementary or secondary schools, certain types of room and board costs, uniforms, computers, and extended day programs costs.

There are some cases where the amount of money that can be dis- tributed tax-free is reduced by any nontaxable scholarships, fellow- ship grants, and educational assistance allowances. The change in the tax law has now allowed for the coordination of the benefits from the education IRA and the HOPE and Lifetime Learning credits for edu- cation expenses, so that there is no dual tax benefit for the same expenses.

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