Education
savings accounts (ESAs)
are the new, improved version
of Education IRAs. Each ESA has a specific
beneficiary
who must
be younger than 18 when you open the account. You contribute after-tax
income to the ESA and the beneficiary can make tax-free withdrawals
to pay qualified education expenses.
With ESAs, you control the way your contributions
are invested. But there are some restrictions. The annual contribution
limit is $2,000 per beneficiary. And your
adjusted
gross income (AGI)
must be less than $110,000 for single
taxpayers and $220,000 for married taxpayers filing a joint return
to be eligible to contribute. If you qualify, though, you can
contribute to as many ESAs as you wish each year, provided each
has a different beneficiary.
ESA earnings are tax free if they’re
used for qualified educational expenses, including tuition, room
and board, books, supplies, academic tutoring, uniforms, transportation
costs, computer equipment, and Internet service costs.
A different twist
What’s unique about ESAs is that earnings
can be used for education expenses from kindergarten through twelfth
grade as well as at postsecondary institutions. Public, private,
boarding, and religiously affiliated schools are all eligible.
But, of course, using the money before the child reaches college
age is likely to limit what’s available for higher education.
