Education IRA Rules and Contribution Limits
Education IRA plans have specific rules and contribution limits that must be followed closely. The contribution limits of this type of IRA savings account for children can be confusing, because of the restrictions and limitations in place with this type of plan. A Coverdell IRA can only be established for a child who is less than eighteen years old, and an adult does not have to be related to the child in any way to establish this type of education account. Contributions to an education IRA can continue until the child who is the named beneficiary turns eighteen years old, and the amount of contributions allowed each year will depend on the income of the person making the contribution.
The best IRA accounts allow large limits, but with a Coverdell the contributions are capped at $2,000 per year, and this limit covers all educational accounts that the beneficiary has. There is an income ceiling in place with an education IRA, and if this ceiling is exceeded the amount of contributions allowed are lowered or even eliminated for the year when this occurs. If the modified adjusted gross income is below $95,000 then the full $2,000 contribution will be allowed for the year. If the modified adjusted gross income is above $110,000 then no contribution is allowed for this year. Incomes which fall between these two levels will allow a partial contribution based on the modified adjusted gross income reported. This is different than the simple IRA rules.
Educational IRA accounts are not intended for retirement planning, instead these plans are intended to be used by the designated beneficiary for education purposes only. It is possible for a child to have several education IRA accounts, and if this happens then the allowable contribution can be spread across different accounts or placed entirely in one of the accounts instead. A stretch IRA may not normally be rolled over to a Coverdell account in most situations, and there may be tax factors involved with these education accounts that should be considered.