Earnings may be taxed at the child's lower rate, depending on the child's age and earnings. Once the child reaches legal age, funds in the account are his or hers to spend. However, withdrawals from an education IRA are not tax free in any year in which you claim a Hope Scholarship Credit or a Lifetime Learning Credit. The maximum credit allotment will be adjusted for inflation after 2001. Borrowers may deduct interest paid on any college loan for the first 60 months of repayment.
Some states now sponsor qualified state tuition programs.
Under these programs, taxpayers can make contributions on behalf of a designated beneficiary. The contributions grow tax-free and the beneficiary can withdraw the funds as needed for higher education expenses. Eligibility for any of the education tax breaks depends on your income level. Consult a tax advisor for more information. Jim Larranaga is Executive Vice President of Priority Publications, a Minneapolis-based publisher of financial newsletters.