Along with creating the Education IRA, the Taxpayer Relief Act allowed investors to draw on traditional IRAs for education expenses without incurring early withdrawal penalties. Acceptable uses for traditional IRA proceeds include tuition, supplies, and--for students enrolled at least part time--room and board.
- Check the IRS's web site for current contribution limits.
- You can invest an IRA in anything.
- Withdrawals will be taxed at your regular income-tax rate. Some or all of your contribution may be tax-free, depending on your income.
- It's your account. You decide how the money is spent, if at all. If your child doesn't go to college, you can hold on to the IRA for your own retirement.
- If you withdraw the money and don't use it for eligible college costs, you'll be hit with a penalty.
This may be a good fallback way to save for college. It isn't the ideal way, though, given your other options. If you qualify for the tax break that a traditional IRA affords, you should probably be using this vehicle as a means for funding your own retirement instead of your child's education.
Roth IRAs >>