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I just found out that it is forbidden to donate to both an education IRA and to a state prepaid tuition program (Internal Revenue Code 529 plan, in this case the Virginia Prepaid Education Plan). I have been doing so unknowingly for two years now.

So what do I do now? I'm guessing I'll have to liquidate the edu. IRAs and pay some sort of penalty--even tho, having been invested in Sci and Tech funds, they've decreased in value.

See page 48 of IRS Publication 590. You owe a $30 (6% of $500) penalty for the 1999 contribution. If you close the account before the due date of your 2000 return, there will be no penalty for the 2000 contribution. You report the penalty on Form 5329.

Phil Marti
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