We have a new model for the education IRA. The old model�let’s call it the Yugo�is gone. You may remember the Yugo�it was a college savings vehicle with more faulty engineering than practical uses. It had very low horsepower; only a yearly maximum contribution of $500. In addition, we were not permitted to take any of the other education credits in a year in which we used money from the education IRA to pay for education expenses. The education expenses that qualified were only for secondary education expenses. 
Well, let’s take a look at the new 2002 model.
We’ll call it the Saturn.
The Saturn model benefits from the latest upgrades in technology, corrects past mistakes and is much more consumer-friendly. Let’s kick the tires:
- The horsepower has increased to an annual maximum contribution of $2,000 per individual. (We still are not permitted to put more than $2,000 into any education IRA for the same individual in a given year.)
- The income limits have been expanded to $95,000 for individuals and $190,000 for married couples. More people will qualify to make the contribution. If your income still prevents you from making the contribution, consider gifting the contribution money to another person who will then open their own Educational IRA.
- The definition of what qualifies as an education expense has been greatly expanded. Tuition, fees and expenses for kindergarten through twelfth grade now qualify. Also allowed are uniforms, transportation and supplementary items or services. This includes expenses at public, private and religious schools. (This is as close as we may get to a voucher system.)
- And listen to this. The Saturn model allows us to use the money from the Education IRA to buy computers, peripheral and technology equipment, and Internet- related services while the student is in school.
- The Saturn model also allows us to put money in both an Education IRA and a qualified tuition program or a qualified college savings program in the same year. Because of the expanded definition of qualified expenses, you may want to make contributions to both of these types of plans in orderto achieve the maximum benefit.
- The Saturn model also allows us to make a distribution from an education IRA and still take either the Hope or Lifetime Learning credits in the same year. In the past, we could not take advantage of more than one education tax incentive in any given year.
- The Saturn model allows us the flexibility of making our education IRA contributions until the April 15 tax filing deadline.
- For people with special needs, the life of the education IRA can be extended beyond the time when the beneficiary reaches age 30. The law also provides that contributions can be made beyond the age of 18 for a person with special needs. This is a fantastic opportunity to put money in a tax-free vehicle for persons who will need additional time to complete their education because of a physical, mental or emotional condition.
Because of the greatly expanded definition of qualified education expenses, many of us should open an education IRA account for ourselves, our kids and our grandkids. (Remember that each person can only put a maximum of $2,000 in the education IRA each year.) It now makes sense to start the education IRA immediately upon the birth of a child or grandchild. By the time the child is ready for elementary school they will be able to pay for uniforms, tuition, computers, Internet access and even transportation to school with tax-free earnings from the account.
If you would like us to open an education IRA for you, your spouse, children or grandchildren at TD Waterhouse, please let us know.