Education Ira Makes A Great Christmas Gift

Parents, grandparents and other adults who make financial gifts to children for the holidays have a new option the education IRA, which allows tax-free investing for higher-education expenses.

Properly called the Education Savings Account, this is a tax-advantaged plan established by the latest revisions in the tax law.

There is no tax on earnings if the account is used according to the rules - to pay full- or part-time higher-education expenses. Earnings that are not used for education are subject to income tax and a 10 percent penalty. (Under the new law, money can be withdrawn without penalty from a traditional or Roth IRA for education, even if the account-holder is not yet 59-1/2, but tax must be paid on withdrawals attributable to earnings and any deductible contributions that had been made.) The beneficiary of an education IRA must be under 18 when contributions are made and must use all proceeds of the account by his or her 30th birthday or pay tax and the penalty on what remains.

An education IRA can be set up through a stock broker. A $500-a-couple limit gradually drops to zero as income increases to $160,000. Couples earning more than that cannot contribute. For people who file individual returns, the $500 maximum is phased out as income increases from $95,000 to $110,000.

Unlike the traditional IRA, which allows contributions for one tax year to be made as late as the following April 15, the new law requires a contributions be made no later than Dec. 31. So the 1998 contribution will have to be made during the calendar year.