Education Savings Accounts (ESAs)
By: Karen Rinehart, CFP®
The Henssler Financial Group Position Paper

Education Savings Accounts (ESAs), formerly known as Education IRAs or Coverdell Savings accounts, are one way to save for your child's education. These accounts allow a contribution of $2,000, annually, per child if the donor's income is under $95,000 for single filers and $190,000 for married filing jointly.

The characteristics of an ESA are as follows:

  • ESAs can be used for primary and secondary education.
  • 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 Since the assets must be withdrawn by the time the beneficiary turns 30, you cannot use this account for yourself.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 per year.

In 2006, Congress did not extend the sunset provisions to the ESA, as they did for 529 Plan accounts. This means the withdrawal of earnings in 2011 and thereafter could be taxable, even if the withdrawal is used for education. The contribution amount could also revert to $500.

These accounts are a way for grandparents to save for primary and secondary education; however, we do not recommend using these accounts for college savings.

In the past, we recommended this type of account. However, since the future for these accounts is unclear, we do not recommend opening new ESA accounts. If you already have an ESA account, we recommend leaving the account as is. We do not recommend contributing additional assets to this type of account. We recommend using a 529 Plan instead.

For more information regarding College Savings Accounts, please contact The Henssler Financial Group at 770-429-9166 or comments@henssler.com

All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing.
 
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