Benefits of ESA Accounts

In 2002, the Education IRA received an overhaul to provide more benefits to the American Tax Payer. The government re-named the account to the Coverdell education savings account, or ESA. This became a very attractive college savings vehicle for many people, including families that wish to save for elementary and secondary school expenses as certain K-12 expenses were added to the list of qualified expenses.

 

There are certain eligibility requirements in the year you wish to contribute to the ESA, which means that might suit one family better than another.

 

For example, tax law prohibits ESA funding once the beneficiary reaches age 18.

In 2002, the contribution limit was increased from $500 per child to $2,000.  

 

When accounts are established by different family members for the same child, the total contributions cannot exceed $2,000 in a year, or a penalty will be owed.

 

The educational account must be fully withdrawn by the time the beneficiary reaches age 30, or else it will be subject to tax and penalties. We recommend consulting with a tax advisor or tax professional in order to navigate the proper solution for you.

 

It is important to emphasize that all contributions goes into an account that will eventually be distributed to the child if not used for college. The Provident advantage is that families can also have the legacy planning in place to convert this account into a self directed account upon the trigger of one of these items.

 

The ESA is on equal footing with the 529 plan when applying for federal financial aid. The account is considered an asset of the account custodian, typically the parent or the parent’s trust.

 

Withdrawals are not reported as student or parent income as long as it is tax-free for federal income taxes.

 

Coordinate withdrawals or other tax benefits, especially the Hope or Lifetime Learning credits with the consultation of your professional advisor for the best course of action.

 

Unless Congress acts, certain ESA benefits expire after 2010. K -12 expenses will no longer qualify, the annual contribution limit will be reduced to $500, and withdrawals will not be tax-free in any year in which a Hope credit or Lifetime credit or Lifetime Learning credit is claimed for the beneficiary.

 

To learn more on ESA accounts and ESA account planning call us toll free 888-855-9856 or e-mail us at info@providentira.com