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Education Savings Account

 
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Education Savings Accounts

The Education Savings Account (ESA) offers several advantages when saving for a child’s education

Education Savings Account (ESA) at a glance:

  • Annual contributions. The annual contribution limit is $2,000. The contribution deadline is April 15 of the following year—same as for Traditional and Roth IRAs.
  • Income limits. Married taxpayers filing jointly can contribute fully if their adjusted gross income (AGI) is under $190,000, and partially if their AGI is less than $220,000. See chart below for more information.
  • Eligible expenses. In addition to qualified higher-education costs (such as tuition, fees, books, supplies, equipment, amounts contributed to a 529 plan or other qualified state tuition program, and room and board), eligible expenses also include qualified elementary- and secondary-education costs, including tuition, tutoring, books, supplies, uniforms, transportation, and even computer equipment, subject to certain limitations.
  • Favorable tax advantages. A contribution to an ESA is eligible for the $14,000 annual gift and generation-skipping tax exclusion. In addition, amounts held in an ESA are not included in the donor's estate for estate tax purposes.
  • Extra contributions for those with “special needs.” Contributions for designated individuals with “special needs” can be made past age 18. Distributions for these individuals need not be made by age 30, as required for other account beneficiaries. “Special needs” beneficiaries are those who require extra time to complete their education because of physical, mental, or emotional disabilities.
Who can contribute?
Parents, grandparents, friends and relatives, and the child for whom the account is being established can contribute to an Education IRA. However, the combined contributions to any child's ESA may not exceed $2,000 per year.

How much can you contribute?

If you meet the income requirements (highlighted in the chart below), you may contribute up to $2,000 annually to an ESA for any child under age 18.

Higher Income Limits May Make Education Savings Easier
If my tax-filing status is … … and my modified adjusted gross income is … … then I can contribute this much to an ESA:
Single Less than $95,000 $2,000 per year per child
$95,000 to $110,000 Partial contribution permitted
More than $110,000 No contribution permitted
Married, filing jointly Less than $190,000 $2,000 per year per child
$190,000 to $220,000 Partial contribution permitted
More than $220,000 No contribution permitted

Are contributions deductible?

Contributions are not deductible and must be made with after-tax dollars. But, because taxes have already been paid on contributions, qualified withdrawals are tax-free.


What about withdrawals?

Earnings and distributions from an ESA are tax- and penalty-free, provided the funds are used for qualified elementary-, secondary- or higher-education expenses and the amount of the withdrawal does not exceed the child's education expenses for that year. Earnings withdrawn for any other purpose will be subject to income tax and may be subject to a 10% penalty tax.

If a child reaches age 30 without using all the money in his or her ESA, the balance may be rolled over into an account for another family member. Otherwise, the money will be automatically distributed to the child, and taxes and penalties may apply. Designated individuals with “special needs,” however, are not subject to required distributions at age 30.

 

IRS CIRCULAR 230 NOTICE: This information is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law. For more information about this notice, see northerntrust.com/circular230.

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Not FDIC insured | May lose value | No bank guarantee

An investment in Northern Funds is not insured by the FDIC, and is not a deposit or obligation of, or guaranteed by The Northern Trust Company or any affiliate. An investment in Northern Funds involves risks, including possible loss of principal.

Please carefully read the prospectus and summary prospectus and consider the investment objectives, risks, charges and expenses of Northern Funds before investing. Call 800-595-9111 to obtain a prospectus and summary prospectus, which contains this and other information about the funds.

Shares of the Northern Funds are offered only by a current Prospectus and are intended solely for persons to whom shares of US registered funds may be sold. This site shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of shares of the Northern Funds in any jurisdiction in which such offer, solicitation or sale would be unlawful.

©2014 Northern Funds | Northern Funds are distributed by Northern Funds Distributors, LLC, not affiliated with Northern Trust.