Significance

• While parents will find this to be a helpful and less painful way to save for a child's education, the tax deduction applies to anyone who makes a contribution to an education IRA. Therefore, if you are a grandparent who is interested in setting aside funds for a grandchild's education, a tax deduction is available to you, too.
  
  

Time Frame

• An education IRA must be set up for the benefit of a child who is under 18 years of age. The only exception to this rule is if the child has special needs. If you believe the child for whom you are interested in establishing an account falls into that category, check with a professional before making such a deductible payment.
  
  

Size

• You may make a contribution of up to $2,000 annually for the benefit of any number of children, but the deductibility of contributions to an education IRA may be limited by your income. For example, your contribution will be deductible if your adjusted gross income for tax purposes is under $95,000 for a single filer, or $190,000 to $220,000 if you file jointly as a married couple. The maximum contribution you make for each child will be reduced gradually for tax purposes if your adjusted gross income is more.
  
  

Benefits

• Each child can use the funds in her education IRA for any qualified educational expense, tax-free. However, when she becomes 30 years old, except if she has special needs, if there are funds remaining in her education IRA, they can be transferred to the account of another qualified family member, tax-free, so long as that person is under 30 years of age.
  
  

Considerations

• Unlike traditional IRAs that you can make tax-deductible contributions to throughout the year, you must make your contribution to an education IRA between January 1 and your filing deadline in the year following the year you are claiming a deduction. Also, the investment your education IRA is not limited to a bank account. You can invest your contributions in mutual funds, an attractive option for those accounts whose funds will not be used for several years.