Ask Mary Beth: Money Q & A |
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Use Education IRA For Grandkids' Education
Are contributions to a Roth IRA deductible? Is the sole purpose of this IRA to provide for future college tuition? Is this a good product for grandparents to invest in for their grandchildren?
Mary Beth answers:
The Roth IRA is not an appropriate vehicle for college savings. The new tax law also established a tax-free "Education IRA." Starting in 1998, you will be able to make nondeductible contributions of up to $500 a year for each beneficiary of an Education IRA to fund their future education expenses.
The $500 annual contribution limit, if phased out of the family's modified adjusted gross income, is between $150,000 and $160,000 on a joint return and between $95,000 and $110,000 on a single return.
Contributions to a Roth IRA are not tax deductible but all the earnings can be withdrawn tax free as long as the money is held in the account at least five years and until the account holder is at least 59 1/2 years old.
Like other IRAs, you must have income from a job in order to contribute. So if your grandchild has income from a part-time (or full-time) job you can contribute on his/her behalf to the grandchild's account up to the annual maximum of $2,000. That will put your grandchildren on a solid road to retirement savings--but not college tuition.
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