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Taxpayers can also establish IRAs specifically for the funding of
higher education costs. Opening an Education IRA is a good way to
save for college, but having one might not provide a net gain.
An Education IRA is also referred to as a 529 Plan. These
state-sponsored college savings plans allow you to make contributions
into an account to pay those future costs. 529 Plans offer tax
advantages to both the account owner and the beneficiary since no
income taxes are paid on the earnings if the money is withdrawn for
qualified educational expenses. Every state has instituted at least
one plan and there are many sources online for more information.
Specifically, it is still unclear whether having an education
savings account would affect your financial aid eligibility. If
that's not an issue, given your aid eligibility or your children's'
ages, such an IRA may make sense.
Contributions of up to $2,000 annually can be made for each child
younger than 18. The non-deductible contributions won't be subject to
a gift tax, and the accounts will be tax exempt.
Distributions that don't exceed amounts spent on education will be
tax free. However, all or part of the excess not spent on
education may be subject to taxes and penalties.
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