Education Savings Accounts (ESAs), formerly known as Education IRAs or Coverdell Savings accounts, were once a good way to save for your child’s education. However, beginning in 2011, the maximum annual contribution is $500 per child per year if the donor’s income is under $95,000 for single filers and $190,000 for married filing jointly.
Only college related expenses are considered qualified expenses. Kindergarten through 12th grade expenses are no longer eligible. Tax-free withdrawals of interest, dividends, and capital gains to pay for kindergarten through 12th grade are no longer be permitted. In addition, you can no longer claim the Hope Scholarship Tax Credit or Lifetime Learning Credit in the same year that a tax-free ESA distribution is taken.
The characteristics of an ESA are as follows:
- ESAs can be used for primary and secondary education in 2010 only.
- You can choose the investments inside an ESA.
- Contributions to an ESA discontinue when the beneficiary turns 18.
- Contributions for special needs individuals can continue past age 18.
- If the individual does not use the assets in the account by the age of 30, they must withdraw the funds from the account within 30 days. In this event, the individual would owe income taxes on the earnings and possibly a 10% excise tax. Since the assets must be withdrawn by the time the beneficiary turns 30, you cannot use this account for yourself.
- If you withdraw the assets for anything other than qualified education expenses, you will owe ordinary income tax on the distribution and a 10% penalty.
- Maximum contribution is $2,000 per child in 2010 and drops to $500 in 2011.
In the past, we recommended this type of account as a way for parents or grandparents to save for primary and secondary education. Since the future for these accounts is unclear, we do not recommend opening a new ESA account. If you already have an ESA account, you have options:
- Leave the account as is and use the assets for higher education expenses.
- Roll the ESA over to a 529 Plan.
- Spend the assets in the account in 2010 for kindergarten through 12th grade education expenses.
We do not recommend contributing additional assets to the account. We recommend using a 529 Plan instead for college savings, as you can contribute significantly more to a 529 account.
For more information regarding ESAs or other education savings options, please contact Henssler Financial at 770-429-9166 or experts@henssler.com.
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