EDUCATION INDIVIDUAL RETIREMENT ACCOUNTS.

SEC. 213. EDUCATION INDIVIDUAL RETIREMENT ACCOUNTS. (a) In General.—Part VIII of subchapter F of chapter 1 (relating to qualified State tuition programs) is amended by adding at the end the following new section: “SEC. 530. EDUCATION INDIVIDUAL RETIREMENT ACCOUNTS. “(a) General Rule.—An education individual retirement account shall be exempt from taxation under this subtitle. Notwithstanding the preceding sentence, the education individual retirement account shall be subject to the taxes imposed by section 511 (relating to imposition of tax on unrelated business income of charitable organizations). “(b) Definitions and Special Rules.—For purposes of this section— “(1) Education individual retirement account.—The term ‘education individual retirement account’ means a trust created or organized in the United States exclusively for the purpose of paying the qualified higher education expenses of the designated beneficiary of the trust (and designated as an education individual retirement account at the time created or organized), but only if the written governing instrument creating the trust meets the following requirements: “(A) No contribution will be accepted— “(i) unless it is in cash, “(ii) after the date on which such beneficiary attains age 18, or “(iii) except in the case of rollover contributions, if such contribution would result in aggregate contributions for the taxable year exceeding $500.111 STAT. 814 “(B) The trustee is a bank (as defined in section 408(n)) or another person who demonstrates to the satisfaction of the Secretary that the manner in which that person will administer the trust will be consistent with the requirements of this section or who has so demonstrated with respect to any individual retirement plan. “(C) No part of the trust assets will be invested in life insurance contracts. “(D) The assets of the trust shall not be commingled with other property except in a common trust fund or common investment fund. “(E) Upon the death of the designated beneficiary, any balance to the credit of the beneficiary shall be distributed within 30 days after the date of death to the estate of such beneficiary. “(2) Qualified higher education expenses.— “(A) In general.—The term ‘qualified higher education expenses’ has the meaning given such term by section 529(e)(3), reduced as provided in section 25A(g)(2). “(B) Qualified state tuition programs.—Such term shall include amounts paid or incurred to purchase tuition credits or certificates, or to make contributions to an account, under a qualified State tuition program (as defined in section 529(b)) for the benefit of the beneficiary of the account. “(3) Eligible educational institution.—The term ‘eligible educational institution’ has the meaning given such term by section 529(e)(5). “(c) Reduction in Permitted Contributions Based on Adjusted Gross Income.— “(1) In general.—The maximum amount which a contributor could otherwise make to an account under this section shall be reduced by an amount which bears the same ratio to such maximum amount as— “(A) the excess of— “(i) the contributor’s modified adjusted gross income for such taxable year, over “(ii) $95,000 ($150,000 in the case of a joint return), bears to “(B) $15,000 ($10,000 in the case of a joint return). “(2) Modified adjusted gross income.—For purposes of paragraph (1), the term ‘modified adjusted gross income’ means the adjusted gross income of the taxpayer for the taxable year increased by any amount excluded from gross income under section 911, 931, or 933. “(d) Tax Treatment of Distributions.— “(1) In general.—Any distribution shall be includible in the gross income of the distributee in the manner as provided in section 72(b). “(2) Distributions for qualified higher education expenses.— “(A) In general.—No amount shall be includible in gross income under paragraph (1) if the qualified higher education expenses of the designated beneficiary during the taxable year are not less than the aggregate distributions during the taxable year.111 STAT. 815 “(B) Distributions in excess of expenses.—If such aggregate distributions exceed such expenses during the taxable year, the amount otherwise includible in gross income under paragraph (1) shall be reduced by the amount which bears the same ratio to the amount which would be includible in gross income under paragraph (1) (without regard to this subparagraph) as the qualified higher education expenses bear to such aggregate distributions. “(C) Election to waive exclusion.—A taxpayer may elect to waive the application of this paragraph for any taxable year. “(3) Special rules for applying estate and gift taxes with respect to account.—Rules similar to the rules of paragraphs (2), (4), and (5) of section 529(c) shall apply for purposes of this section. “(4) Additional tax for distributions not used for educational expenses.— “(A) In general.—The tax imposed by this chapter for any taxable year on any taxpayer who receives a payment or distribution from an education individual retirement account which is includible in gross income shall be increased by 10 percent of the amount which is so includible. “(B) Exceptions.—Subparagraph (A) shall not apply if the payment or distribution is— “(i) made to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary, “(ii) attributable to the designated beneficiary’s being disabled (within the meaning of section 72(m)(7)), or “(iii) made on account of a scholarship, allowance, or payment described in section 25A(g)(2) received by the account holder to the extent the amount of the payment or distribution does not exceed the amount of the scholarship, allowance, or payment. “(C) Excess contributions returned before due date of return.—Subparagraph (A) shall not apply to the distribution of any contribution made during a taxable year on behalf of a designated beneficiary to the extent that such contribution exceeds $500 if— “(i) such distribution is received on or before the day prescribed by law (including extensions of time) for filing such contributor’s return for such taxable year, and “(ii) such distribution is accompanied by the amount of net income attributable to such excess contribution. Any net income described in clause (ii) shall be included in gross income for the taxable year in which such excess contribution was made. “(5) Rollover contributions.—Paragraph (1) shall not apply to any amount paid or distributed from an education individual retirement account to the extent that the amount received is paid into another education individual retirement account for the benefit of the same beneficiary or a member of the family (within the meaning of section 529(e)(2)) of such 111 STAT. 816beneficiary not later than the 60th day after the date of such payment or distribution. The preceding sentence shall not apply to any payment or distribution if it applied to any prior payment or distribution during the 12-month period ending on the date of the payment or distribution. “(6) Change in beneficiary.—Any change in the beneficiary of an education individual retirement account shall not be treated as a distribution for purposes of paragraph (1) if the new beneficiary is a member of the family (as so defined) of the old beneficiary. “(7) Special rules for death and divorce.—Rules similar to the rules of paragraphs (7) and (8) of section 220(f) shall. “(e) Tax Treatment of Accounts.—Rules similar to the rules of paragraphs (2) and (4) of section 408(e) shall apply to any education individual retirement account. “(f) Community Property Laws.—This section shall be applied without regard to any community property laws. “(g) Custodial Accounts.—For purposes of this section, a custodial account shall be treated as a trust if the assets of such account are held by a bank (as defined in section 408(n)) or another person who demonstrates, to the satisfaction of the Secretary, that the manner in which he will administer the account will be consistent with the requirements of this section, and if the custodial account would, except for the fact that it is not a trust, constitute an account described in subsection (b)(1). For purposes of this title, in the case of a custodial account treated as a trust by reason of the preceding sentence, the custodian of such account shall be treated as the trustee thereof. “(h) Reports.—The trustee of an education individual retirement account shall make such reports regarding such account to the Secretary and to the beneficiary of the account with respect to contributions, distributions, and such other matters as the Secretary may require. The reports required by this subsection shall be fifed at such time and in such manner and furnished to such individuals at such time and in such manner as may be required.”. (b) Tax on Prohibited Transactions.— (1) In general.—Paragraph (1) of section 4975(e) (relating to prohibited transactions) is amended by striking “or” at the end of subparagraph (D), by redesignating subparagraph (E) as subparagraph (F), and by inserting after subparagraph (D) the following new subparagraph: “(E) an education individual retirement account described in section 530, or”. (2) Special rule.—Subsection (c) of section 4975 is amended by adding at the end of subsection (c) the following new paragraph: “(5) Special rule for education individual retirement accounts.—An individual for whose benefit an education individual retirement account is established and any contributor to such account shall be exempt from the tax imposed by this section with respect to any transaction concerning such account (which would otherwise be taxable under this section) if section 530(d) applies with respect to such transaction.”, (c) Failure To Provide Reports on Education Individual Retirement Accounts.—Paragraph (2) of section 6693(a) (relating to failure to provide reports on individual retirement accounts or 111 STAT. 817annuities) is amended by striking “and” at the end of subparagraph (B), by striking the period at the end of subparagraph (C) and inserting and”, and by adding at the end the following new subparagraph: “(D) Section 530(h) (relating to education individual retirement accounts).”. (d) Tax on Excess Contributions.— (1) In general.—Subsection (a) of section 4973 is amended by striking “or” at the end of paragraph (2), by adding “or” at the end of paragraph (3), and by inserting after paragraph (3) the following new paragraph: “(4) an education individual retirement account (as defined in section 530),”. (2) Excess contributions defined.—Section 4973 is amended by adding at the end the following new subsection: “(e) Excess Contributions to Education Individual Retirement Accounts.—For purposes of this section— “(1) In general.—In the case of education individual retirement accounts maintained for the benefit of any 1 beneficiary, the term ‘excess contributions’ means— “(A) the amount by which the amount contributed for the taxable year to such accounts exceeds $500, and “(B) any amount contributed to such accounts for any taxable year if any amount is contributed during such year to a qualified State tuition program for the benefit of such beneficiary. “(2) Special rules.—For purposes of paragraph (1), the following contributions shall not be taken into account: “(A) Any contribution which is distributed out of the education individual retirement account in a distribution to which section 530(d)(4)(C) applies. “(B) Any contribution described in section 530(b)(2)(B) to a qualified State tuition program. “(C) Any rollover contribution”. (e) Technical Amendments.— (1) Section 26(b)(2) is amended by redesignating subparagraphs (E) through (P) as subparagraphs (F) through (Q), respectively, and by inserting after subparagraph (D) the following new subparagraph: “(E) section 530(d)(3) (relating to additional tax on certain distributions from education individual retirement accounts),”. (2) Subparagraph (C) of section 135(c)(2), as added by the preceding section, is amended by inserting “, or to an education individual retirement account (as defined in section 530) on behalf of an account beneficiary,” after “(as defined in such section)”. (3) The table of sections for part VIII of subchapter F of chapter 1 is amended by adding at the end the following new item: “Sec. 530. Education individual retirement accounts.”. (f) Effective Date.—The amendments made by this section shall apply to taxable years beginning after December 31, 1997.111 STAT. 818