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CASH MANAGEMENT

Educational IRA

First American Bank & Trust makes saving for a child's education a little easier by setting up an Educational IRA, also known as a Coverdell Education Savings Account, where you can begin making contributions on an annual basis.

Benefits:

  • Created as an incentive to help parents and students save for education expenses
  • Tax-deferred earnings so you can grow your savings
  • Contributions to an Educational IRA are not deductible, but amounts deposited in the account grow tax-free until distributed. The beneficiary will not owe tax on the distributions if they are less than a beneficiary's qualified education expenses at an eligible institution. This benefit applies to qualified higher education expenses as well as to qualified elementary and secondary education expenses.

Contribution Limits:

  • The total contributions for the beneficiary of this account cannot be more than $2,000 in any year, no matter how many accounts have been established. A beneficiary is someone who is under age 18 or is a special needs beneficiary.
  • There are contribution limits for taxpayers based on the contributor's Modified Adjusted Gross Income. Contributions to an Education IRA may be made until the due date of the contributor's return, without extensions.

Distributions:

  • Distributions are tax-free as long as they are used for qualified education expenses, such as tuition and fees, required books, supplies and equipment and qualified expenses for room and board.
  • There is no tax on distributions if they are for enrollment or attendance at an eligible educational institution. This includes any public, private or religious school that provides elementary or secondary education as determined under state law. Eligible institutions also include any college, university, vocational school or other postsecondary educational institution eligible to participate in a student aid program administered by the Department of Education. Virtually all accredited public, nonprofit and proprietary (privately owned profit-making) postsecondary institutions are eligible.
  • If there is a balance in the Educational IRA when the beneficiary reaches age 30, it must generally be distributed within 30 days. The portion representing earnings on the account will be taxable and subject to the additional 10% tax. The beneficiary may avoid these taxes by rolling over the full balance to another Coverdell Education Savings Account for another family member. For more details, see IRS Publication 970, Tax Benefits for Higher Education at www.IRS.gov, or call 800 829-3676.

*Eligibility and contribution amount information is valid as of January 1, 2013.

First American Bank & Trust and its directors, officers, employees (collectively, "First American") are not permitted to give legal or tax advice. While First American can assist clients in the areas of estate and financial planning, only an attorney can draft legal documents, provide legal services and give legal advice. Customers of First American should consult with their legal and tax advisors prior to entering into any financial transaction or estate plan.

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