education IRA investment & finance definition

A type of Individual Retirement Account (IRA) that allows parents to save money to pay for their children’s’ education. This type of IRA has very little to do with retirement. Education IRAs were first created in the Taxpayer Relief Act of 1997. As of this printing, a maximum of $2,000 a year can be contributed, if certain conditions are met. Investments accumulate tax free and the account creator decides how to invest the funds and how the funds will be spent. Eligible expenses include college, elementary, and secondary tuition and the purchase of books and supplies. If the money is drawn for non-education expenses, federal taxes will be owed at the taxpayer’s tax rate, along with a 10 percent penalty. Also called Coverdell education savings account.