Sanderson Smith (
Sat, 02 May 1998 17:00:44 -0800

To those receiving this note... this was put into the Cate Faculty Folder for the Cate faculty to read. It may be of

Extra note to Stat. and Alg. II students... your parents might find this interesting.



While you can invest only $500 a year per child under age 18, an Education IRA can be a very good deal because the
investment earnings are not taxed as long as the money is used to pay college tuition. If you anticipate paying college
tuition in the future, an Education IRA can be a very sound investment.

However, if you anticipate paying college tuition after age 59 1/2, a Roth IRA may well be better than an Education IRA.
After age 59 1/2, everything withdrawn from a Roth IRA is tax-free. And, you can invest $2000 per year in a Roth IRA (vs.
$500 for an Education IRA).

Here are some number examples...

Suppose you invest $500 a year for 18 year in an IRA.
If the interest rate is 10%, you would have $22,800 in 18 years. This includes $13,800 in interest.

If this money is in a Roth IRA account, all of it is tax-free, regardless of how the money is used.

If the money is in an Education IRA, all of it is tax-free if the $13,800 is used for college tuition. However, if your
child doesn't go to college, if he/she gets a scholarship, if you need the money for an emergency, etc., etc., then the
$13,800 becomes taxable income in an Education IRA. (Basically, any of the investment earnings not used for college tution
becomes taxable income.)

And here's another kicker. You can invest up to $2,000 in a Roth IRA (as contrasted to just $500 in an Education IRA). If
you invested $2,000 for 18 years at 10%, you would have a total of $91,000 in 18 years, including $55,000 in interest. The
whole $91,000 could be withdrawn, tax-free.

Again, I claim no genuine expertise in this area. I believe what I have written above is correct, but I am more than
willing to be corrected if my interpretations are wrong.