Education Savings and Planning

Educational Savings Accounts should be addressed in three different categories:
1) 529 College Savings Plans

2) Education Savings Accounts, and

3) Custodial Accounts.

529 College Savings Plans

A 529 plan is a state-sponsored education savings program that allows individuals, regardless of their income, to set aside monies in a tax-deferred account to pay for a beneficiary’s post-secondary education. 529 Plans allow for significantly higher contributions than other education savings plans and are not subject to income phase-out limits. While contributions are not tax-deductible, earnings in the account grow federally tax-deferred until withdrawn. When withdrawn for qualified higher education expenses, earnings are free from federal income tax beginning January 1, 2002. For a complete overview of 529 College Savings Plans programs by state, refer to the attached chart.

Education Savings Accounts

The Education Savings Account (ESA), formerly Education IRA, is a savings plan set up and managed by a parent or other adult for the benefit of a minor. Accounts are tax-free is used to help pay qualified education costs (tuition, books, supplies and equipment, room and board). Annual contributions are limited to $2,000 per year starting in year 2002. Eligibility phase-out begins at modified Adjusted Gross Income (AGI) of $190,000 beginning in year 2002 for contributors who are married filing jointly ($95,000 AGI for singles).

Contributions into the ESA are not tax deductible, contributions grow tax-free, and withdrawals for qualified education expenses are also tax-free. Starting in the year 2002, qualified withdrawals for elementary and secondary schools, both public and private, will also be tax-free. Withdrawals of earnings for non-qualified education expenses may be subject to a 10%, and will be considered taxable income.

If the designated beneficiary never enrolls in higher education, the designated beneficiary may be changed from one child to another member of that child’s family without triggering tax consequences. If no family member uses the ESA for educational purposes, distributions from the ESA follow regular IRA guidelines and all assets must be withdrawn by the time the designated beneficiary reaches age 30. Rollovers must be made within 60 days of withdrawal and only one per 12 months to avoid the 10% tax penalty.

Custodial Accounts

A custodial account (UGMA: Uniform Gift to Minors Account) can be established and managed by an adult for the benefit of a minor child. Assets are turned over to the minor at the age of majority and can be used at that time, for any purpose. The minor’s social security number is utilized and earnings are taxed as follows for children under age 14:

* 1st $750 of earnings = Tax - none (Tax-free)
* Next $750 of earnings = Tax - child’s tax rate
* Over $1,500 of earnings = Tax - taxed at parent’s rate