[10048]
June 24, 1998
TO: PENSION COMMITTEE No. 38-98
RE: EDUCATION IRA BILL SENT TO PRESIDENT, VETO EXPECTED
______________________________________________________________________________
Congress recently passed H.R. 2646, the “Education Savings and School Excellence Act of
1998,” which now will be sent to the President. A veto is expected. The bill contains a provision that
would raise the annual contribution limit to Education IRAs to $2,000 from $500. It also would permit
tax-free withdrawals from Education IRAs to pay for elementary and secondary school education
expenses. The Clinton Administration has opposed legislation that would permit such withdrawals from
Education IRAs.
With respect to the Education IRA, the bill specifically includes the following provisions:
1. The term “qualified education expenses” would be expanded to permit withdrawals from
Education IRAs to be used for elementary and secondary school expenses and homeschooling
expenses. The bill, however, would permit such use of Education IRA assets only for
contributions (and earnings thereon) made during calendar years 1999 to 2002. Such
contributions and earnings would be tracked separately by the Education IRA trustee.
2. The contribution limit to Education IRAs would increase from $500 to $2,000 for calendar
years 1999 to 2002.
3. The current age limitation on contributions (age 18) to Education IRAs would be waived for
designated beneficiaries with special needs. Additionally, there would be no required deemed
distribution of any balance in an Education IRA of a special needs beneficiary when the
beneficiary reaches age 30.
4. Corporations would be permitted to contribute to Education IRAs (and would not be subject
to any type of income limitation on eligibility to make contributions).
5. In the event of death of a designated beneficiary, the balance remaining in the Education IRA
would be distributable to a spouse or other contingent beneficiary, and where such beneficiary
is a “family member,” the beneficiary would become the “designated beneficiary” of the
account, which would continue to be treated as an Education IRA;
1 See Institute Memorandum to Pension Committee No. 28-98 and Pension Operations Advisory Committee
No. 17-98, dated May 11, 1998.
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6. The bill makes the following “technical corrections”:
a. Any balance remaining in an Education IRA would be deemed to be distributed within 30
days after the date that the named beneficiary reaches age 30;
b. It would be clarified that distributions from Education IRAs are treated as representing a
pro-rata share of the principal and accumulated earnings in the account;
c. The 10-percent tax on non-qualified distributions would not be imposed where the
distribution is used to pay for qualified education expenses and is includable income solely
because the taxpayer also had elected either the HOPE or Lifetime Learning tax credit in
that same year;
d. The 10-percent tax would not apply to the distribution of any contribution to an
Education IRA made during a taxable year if the distribution is made on or before the due
date (including extensions) by which the beneficiary is required to file a tax return;
e. It would be clarified that tax-free rollovers and account redesignation may be made to a
new beneficiary as long as the new beneficiary is under age 30 (rather than under age 18);
f. Qualified higher education expenses taken into account when determining the exclusion
from taxation under section 530 would not be permitted to be taken into account for a
section 162 deduction or section 135 exclusion.
The conference report, which includes bill language and the accompanying explanatory
statement, is attached.
Please note that many of the “technical correction” measures noted in item 6, above, also are
included in a different technical corrections bill, which is part of the IRS restructuring package, also
being considered by Congress.1 That bill has a greater likelihood of being signed into law this year.
Russell G. Galer
Senior Counsel
Attachment