As with traditional IRAs, there is a required distribution age for any unused portion of the education IRA. Additionally, unused money may be rolled over into another education IRA for another family member. A rollover may be made as long as the original owner of the education IRA is under the age of 30. However, if the rollover isn’t done and the beneficiary reaches 30 years of age, the remaining portion of the IRA must be distributed to the beneficiary. This money will then be taxed at the individual’s ordinary income rate, including a 10-percent early withdrawal penalty. This, of course, seems unfair. After all, the government is requiring you to take out the money that hasn’t been used; yet they are penalizing you because it is technically a premature distribution. This is why it’s important either to use the entire amount, or roll over any unused portion.
Because the limit on annual contributions to an education IRA is $2000, there is no worry about triggering any gift tax to the recipient. But, when rolling over an unused education IRA, there is potential for gift tax consequences. If the rollover is made to a family member of the same generation (i.e., brother to sister, etc.), there is no taxable gift. However, if the rollover is made from one generation to the next, the gift tax could apply. As long as the education IRA rollover is $11,000 or less, there would be no gift tax. Rollovers that exceed $11,000 would be subject to the tax.
An easy strategy to preparing for your child’s education is to invest in bonds. There are bonds that are specially designed for education pur- poses, like the Series EE bonds, which we discussed in Chapter 7. For that reason, we don’t go into too much depth here. However, by purchasing a bond and matching up the maturity date to coincide with when your child will start school, you will have created a source of money that can be used for tuition, books, room and board, or whatever school costs you want to use that money for. Specifically, you would want to purchase a bond that matures the July or August before your child is due to start school.
When considering bonds, you will also want to invest in bonds that reinvest the interest that accrues, rather than in bonds that distribute