As of January 1, 1998, parents and other interested persons may be able to establish an Education IRA for a child under the age of 18.

Contributions to the account will not be tax deductible, but the earnings will be tax-free if used for qualified higher education expenses.

You are eligible to contribute to an Education IRA if you and your spouse file a joint tax return and have a joint MAGI of $150,000 or less, or, if you file a single return and your MAGI is $95,000 or less. Those with higher incomes may qualify for reduced contributions. You aren't eligible to contribute if you make a contribution to a qualified state tuition program during the year.

CONTRIBUTIONS AND WITHDRAWALS

Contributions cannot exceed $500 per child per year. If parents, grandparents, and others have each set up an account for the same child, their combined contributions cannot exceed $500 per child per year. Careful tracking is important to avoid possible penalties.

Withdrawals from an Education IRA are tax and penalty free, provided the child's qualified higher education expenses equal the withdrawals from the Education IRA for that year. Otherwise, any withdrawal of earnings from the account is taxable and a 10% penalty tax may apply.

An Education IRA can be a great savings vehicle even if you're not sure whether your child will attend college or vocational school. The funds can be transferred from one child's Education IRA to another child's if that child is a member of the same family.