This Account use to be called “Education Individual Retirement Account“, which I always thought was a poor naming choice for a college savings account!!! The plan is sometimes called an “Educational Savings Account” or an ESA.
So what are the properties of an ESA?
- The money put into an ESA is NOT tax deductible. So you can’t take a deduction from your taxes the year that you make the contribution.
- A child can only have a maximum of $2,000 from all sources!!! By this I mean if I had an ESA from my son and put $2,000 into it, that’s all the money for the year that can go into the account. So nobody else can contribute to any ESA for that child once it hit the $2,000 mark!
- The account must be started and all the contribution made before the child (beneficiary) is 18 years old.
- Earning are not taxed if they are used for qualified educational expenses (elementary school, high school, or College)
- The amount that you can contribute starts to phase out if you make more that $95,000 if you are single, and $190,000 if you are married.
- Once a single person make over $110,000 or a married person makes over $210,000, they are no long alonger allowed to contribute to an ESA.
- You can contribute up to $2,000 for each child.
- Distributions from ESA’s earnings that are used for qualified education expenses* are tax and penalty free.
- ***Distributions of contributions, is always tax and penalty free because no tax deductions are allowed for amounts contributed to an ESA.
*qualified education expenses are expenses such as tuition, fees, books, supplies, equipment, tutoring, uniforms, room & board, transportation, computer equipment, supplemental items and services (including extended day programs).
If you have a balance in the ESA when the beneficiary turns 30 years old, it must be distributed within 30 days. The earnings in the account will be taxable, and a 10% penalty will hit the account too.
While this sounds like a good option, I think there might be some better options out there… Still, it’s not bad if nothing else was out there…