and managed by a parent or guardian for the benefit
of a minor. It can be used to pay for qualified education expenses for kindergarten through 12th grade (only through 2010) and for college. An ESA is ideal as a supplement to a 529 plan, which has several advantages for college savings.
An ESA has some benefits, as well as some limitations:
Account earnings can grow tax-deferred.
Tax-free withdrawals when the money is used for qualified education expenses, such as tuition, fees, books, room and board, before the beneficiary reaches age 30.
Adult manages account until transferred to the child. The account must be liquidated when the beneficiary is 30 to avoid penalties and taxes on the remaining account balance.
Contributions limited to $2,000 per year until the beneficiary's 18th birthday and are not tax-deductible.
Contributions can be made to an ESA and a 529 plan for the same beneficiary in the same year.
Preserve potential financial aid benefit—only 5.6% of the account's value is considered parental assets.
See chart for contribution limits according to adjusted gross income.
Withdrawal penalties
Withdrawals of earnings for nonqualified expenses may be subject to a 10% federal penalty and are considered taxable income.
Contributions over the legal maximum of $2,000 per year are subject to an additional 6% tax for each year the excess remains in the account.
Unused funds when the beneficiary reaches age 30 must be distributed to him or her as a taxable withdrawal. However, tax-free status can be preserved if funds rolled over to a qualified family member of the beneficiary.
Withdrawal penalty exceptions
Death or disability of beneficiary and other conditions
Investors should consult their own tax and interment advisors about their specific situation prior to taking action. We believe the information provided is reliable, but Charles Schwab & Co., Inc. and its affiliates do not guarantee its accuracy, timeliness or completeness.
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