In 1997, Congress passed the Taxpayer Relief Act of 1997. One of the features of the legislation was the creation of the Educuation Individual Retirement Acct. Then in 2001, President Bush signed into law the Economic Growth and Tax Relief Reconciliation Act transforming the Education IRA into the Coverdell Education Savings Account (CESA). Named after the late Senator Paul Coverdell.

What Is An Education Savings Account?
The Education Savings Account is a nondeductible account that features tax-free withdrawals for a very specific purpose - a child's higher education expenses.

At first glance, the Education Savings Account looks similar to Traditional and Roth IRAs. Education distributions are also permitted from these accounts. The crucial difference is that while qualified education distributions from a traditional or Roth IRA are penalty free, the same distributions from an Educational Savings Account are both penalty free and tax free.

Am I Eligible To Contribute To An Education Savings Account?
You are eligible if your modified adjusted gross income (MAGI) does not exceed certain limits (See table below).

There is no requirement that the contributor have earned income. Nor is there any requirement that the contributor be under age 70.5.

How Much Can I Contribute?
The total aggregate contribution into one or more Education Savings Accounts on behalf of a child is $2000 for a taxable year. As a contributor, your allowable contribution depends on your MAGI. The MAGI limits are:

The annual Education contribution deadline for individuals is generally April 15th of the year following the Tax Year for which the contribution is made

Your contributions to an Educational Savings Account, however, are not aggregated with your Traditional or Roth contributions. In other words, if you establish an Education Savings Account for a child, you can contribute a total of $5,000 or $5,500 - $3000 or $3500 to your Roth IRA and/or traditional IRA and $2000 to an Education Savings Account for the child.

How Does The Law Define A "Child?"
A child is defined as a person who is under the age of 18. Contributions may be made on behalf of the child until the day before his/her 18th birthday. Contributions on behalf of an individual age 18 or older are not permitted.

NOTE: Special Needs children are not subject to this restriction

What If I Want To Save For More Than One Child?
The law appears to allow contributors to deposit the maximum allowable contribution into Education Savings Accounts for as many children as desired.

Do I Pay Taxes on the Earnings?
No and neither does the child (provided the money is used for qualified education expenses). That's the best part of the Education Savings Account. When the beneficiary is ready to take his or her withdrawal for school, there are no taxes due on any of the interest that your money has earned.

What Is A Qualified Higher Education Distribution?
The term "qualified higher education expense" means tuition, fees, books, supplies, and equipment required for the enrollment or attendance at an eligible higher education institution. Basically, an eligible higher education institution is an area vocational school or university.

What is a Qualified Elementary or Secondary Education Distribution?
Qualified elementary or secondary educational expenses are generally similar to those for qualified higher education. Unique to qualified elementary or secondary expenses are those expenses for the purchase of certain computer technology, equipment or Internet access and related services if used by the child during any of the years the child is in school. The term school means any school that provides elementary or secondary education, Kindergarten through Grade 12. This includes public, private or religious schools.

What Is A Nonqualified Distribution?
A nonqualified distribution is any distribution other than an education expense distribution. When a nonqualified distribution is taken, a ratio of contributions and earnings is withdrawn. The earnings portion is then subject to taxes and a 10 percent penalty. Distributions made on account of death, disability, or scholarship are not subject to the 10 percent penalty. However, the earnings portion of such distributions is taxable.

Can I Move Funds From My Traditional Or Roth IRA Into An Education IRA?
Unfortunately, no you cannot. You can, however, roll funds over from one Education Savings Account into a second one established for the same child.

Also, a twist with the new Education account is the ability to roll an Education Savings Account into an Education Savings Account for a new designated beneficiary who is a member of the same family (as defined by law). That way, if a child decides not to pursue his or her education, the account can be transferred to a relative who does.

How Do I Open An Education Savings Account?
Simply see any of our CSR representatives. We will explain the nature of these accounts in more detail and help you complete the simple forms necessary to establish an Education Savings Account for your child.

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