Educational Savings Accounts

Are college expenses looming on your horizon?  Educational Savings Accounts are another option available to save for college costs.

This savings account is a nondeductible contribution limited to $2,000 per year, per child.  The earnings on the contribution grows tax deferred and can be 100% tax free if used for qualified expenses.   The $2,000 limit is from all sources, including grandparents.

Qualified college expenses include tuition and fees, books, supplies, equipment, and room and board if the student is attending at least half time.   Educational Savings Accounts may also cover expenses for K-12.

Contributions may be made until the child reaches 18.  And the monies must be used by the time the child/beneficiary reaches 30.  However as the asset is the parents’, the beneficiary may be changed to another family member.   This allows flexibility in planning for the child’s further education.  Some children may choose other routes like military, or receive scholarships.

And since the asset is the parents, it is counted as such in the financial aid family contribution.

The money may only be withdrawn tax free if it is used for qualified expenses.  If it is used for other purposes, the earnings are included in taxable income, and is subject to a 10% penalty.   Be careful to not over-fund.


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