Education Savings Account Tutorial
Eligibility
There are several parties involved in the establishment and administration of an education savings account (ESA). Each party's role is defined by regulations and the ESA plan document. These parties are the following:
- The designated beneficiary - the individual (child) for whom the ESA is established
- The grantor or depositor - the individual or entity that establishes and contributes to the ESA
- Responsible individual - the person who manages the ESA, including directing its investments and requesting distributions on behalf of the designated beneficiary
- Successor responsible individual - the individual designated to assume the duties of the responsible individual when the primary responsible individual is unable to carry out or relinquish responsibility for those duties
- Death designated beneficiary - the individual designated to receive the ESA balance if the designated beneficiary dies
In the list above, the responsible individual is usually the designated beneficiary's parent or legal guardian. The designated beneficiary, however, becomes the responsible individual upon reaching the age of majority as determined by his or her state of residence. Only one person may serve as the responsible individual at any given time.
The death designated beneficiary must not be more than 30 years old and must assume ownership of the assets within 30 days after the death of the designated beneficiary.
Who Can Establish and Contribute to an Education Savings Account?
Anyone who meets the compensation requirements (which we discuss below) can establish and contribute to an ESA. This means that the beneficiary can establish an ESA for him- or herself.
Corporations, tax-exempt organizations and other non-person entities are allowed to contribute to an ESA on behalf of a beneficiary. The income limitations that apply to individuals do not apply to these entities.
Compensation Requirements
To be eligible to contribute to an ESA, the contributor's modified adjusted gross income (MAGI) shown on his or her income tax return must not be more than $110,000 for single filers and $220,000 for married individuals filing joint returns.
Individuals whose MAGI falls between the following ranges are able to make a partial contribution, which will be an amount less than the contribution limit of $2,000 per year:
- Single individuals - $95,000 to $110,000
- Married individuals filing a joint return - $190,000 to $220,000
(For more on contributions to the ESA, see the section of this tutorial devoted to contributions.)
No Compensation Required
While an individual whose income exceeds the limits stated above is not eligible to contribute to an ESA, an individual is not required to have compensation to be eligible to contribute to an ESA. This is unlike the rules for a Traditional or Roth IRA, which both require an individual to have eligible compensation to contribute.
Age Requirements
For Contributions
Contributions can be made to an ESA for any individual who is under age 18, but an ESA cannot be established for an unborn child.
For Distributions
The balance in the account generally must be distributed within 30 days after the earlier of the following events:
- the beneficiary reaches age 30
- the beneficiary's death
These age limitations are waived for special-needs beneficiaries - individuals who, because of a physical, mental or emotional condition (including a demonstrable learning disability), require additional time to complete their education.
Change in the Designated Beneficiary
The designated beneficiary may be changed to a qualified family member who has not attained age 30 if the original designated beneficiary dies or has no qualified education expenses (which we define in the section on distributions). The designated beneficiary may also be changed from one spouse or former spouse to another in accordance with a court-approved divorce decree.
For the purpose of changing a designated beneficiary of an ESA, qualified family members include the following:
- the designated beneficiary's spouse
- the designated beneficiary's son or daughter or descendant of the beneficiary's son or daughter
- the designated beneficiary's stepson or stepdaughter
- the designated beneficiary's brother, sister, stepbrother or stepsister
- the designated beneficiary's father or mother or ancestor of either parent
- the designated beneficiary's stepfather or stepmother
- the designated beneficiary's niece or nephew
- the designated beneficiary's aunt or uncle
- the spouse of any individual listed, including the beneficiary's son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law
- any individual for whom the home of the designated beneficiary is his or her primary home for the entire tax year
- the designated beneficiary's first cousin