Education Savings Account Tutorial
Contributions
Regular contributions to ESAs must be made in cash.
Transfers and rollovers of assets from other ESAs may be made in the form of securities and other non-cash items. The responsible individual (the role of whom is explained in the section on eligibility), however, should check with the ESA custodian/trustee to determine permissible investments for the ESA.
Contribution Limit
The maximum amount that may be contributed on behalf of any designated beneficiary is $2,000 per year. This is true regardless of the amount of ESAs maintained by the beneficiary.
If an eligible individual contributes to more than one ESA, he or she may contribute up to his or her maximum limit for each beneficiary's account. For example, say an individual has a modified adjusted gross income (MAGI) of $50,000, and has two children under age 18. That individual can contribute a maximum of $2,000 to each child's ESA.
Phase-out Ranges
As we stated in the section of eligibility, individuals whose MAGI falls between the following phase-out ranges are able to make a partial contribution (an amount less than the contribution limit of $2,000):
- Single individuals - $95,000 to $110,000.
- Married individuals filing a joint return - $190,000 to $220,000.
For individuals whose income falls within these ranges, the following formula may be used to determine the amount they may contribute to an ESA:
Jack and Jane are married and file a joint tax return for 2005, and their combined MAGI, which is $215,000, falls within the phase-out range of $190,000 to $220,000. Wanting to contribute to ESAs for their nieces, Jack and Jane are each allowed to make only a partial contribution to the ESAs. Using the formula above, Jack and Jane calculate their maximum contribution amount as follows:
Jack and Jane may each contribute $333 (i.e. Jane can contribute $333 in total and Jack can contribute $333 in total), giving each niece $333. Or Jack and Jane may each contribute $333 to both nieces' ESAs (Jill contributes $333 to both accounts and Jack contributes $333 to both accounts), in which case each niece would receive $666.
Contribution Limit x
(Highest Dollar Limit of MAGI Range - MAGI) |
| Highest Dollar Limit of Phase-out Range - Lowest Dollar Limit of Phase-out Range |
| $2,000 x ($220,000 - $215,000) |
| $220,000 - $190,000 |
= $333
Contribution Deadline
Like IRA contributions, ESA contributions must be made by the tax-filing deadline (not including extensions) of the designated beneficiary. This is usually Apr 15 following the tax year.
Permissible Investments in ESAs
One benefit of investing in an ESA is that the investment options are many and varied. There are relatively few investments that are not permitted in an ESA, but whether the responsible individual (the person who manages the ESA) can choose the investments depends on the financial institution. Some accounts may be limited to a pre-selected core group of investments or a specific investment while other accounts allow the responsible individual to choose the investments.
Permissible investments for ESAs include stocks, bonds, mutual funds, real estate, some coins and money market funds.
Investments in Collectibles
ESAs cannot contain investments in collectibles, which include: art works, rugs, antiques, metals, gems, stamps, coins, alcoholic beverages and other types of tangible personal property.
The exception to the rule is that ESAs can have investments in U.S. gold coins, silver coins minted by the U.S. Treasury, certain forms of platinum, gold, silver, palladium and platinum bullion. Volume limitations apply.
Some financial institutions place further restrictions on ESA investments.