Education IRA

Discover the Benefits of an Education Savings Account!

What is the Education Savings Account (ESA)?
The Education Savings Account is a non-deductible account that features Tax-Free withdrawals for a very specific purpose - a child's qualified education expenses. Unlike the Traditional IRA, you cannot take a tax deduction for any of the contributions that you make to an ESA.

At first glance, the ESA looks similar to Traditional and Roth IRA's. After all, qualified education distributions are permitted from these accounts as well. The crucial difference is that while qualified education distributions from a Traditional or Roth IRA are penalty free, the same distributions from an ESA are penalty and tax-free.

Am I eligible to contribute to an Education Savings Account?
There are two eligibility considerations for an ESA:

• The child (beneficiary) for whom you are contributing must be under 18 years of age (exceptions may apply for beneficiaries with a physical, mental, or emotional condition requiring additional time to complete their education).
• The contributor who is an individual must meet the Modified Adjusted Gross Income (MAGI) limits (see table below).

How much can I contribute?
The total aggregate contribution into one or more ESAs on behalf of the same child is $2000 for a taxable year. As a contributor, your allowable contribution depends on your MAGI.

When is the contribution deadline for funding an Education Savings Account?
The contribution deadline for the ESA is dependent upon the tax year for which the contribution is made:

• 2001 and prior tax years - the ESA can be opened and funded until December 31st of the tax year
• 2002 and after - the ESA can be opened and funded any time between January 1st and the date your tax return is due for the tax year, excluding extensions. This is normally April 15th of the following year.

Do I pay taxes on the earnings?
No, and neither does the child, provided the money is used for qualified educational expenses. That's the best part of the Education Savings Account. However, when the beneficiary is ready to take his or her withdrawal for school, there are no taxes due on any of the interest that your money has earned.

What is a Qualified Education Distribution?
A qualified education distribution is tax and penalty free if used to pay the following educational expenses incurred by the beneficiary (dependent upon the tax year):

• Post Secondary Tuition
• Fees, Books, Supplies, & Equipment
• Room and board expenses posted by the school, or $2500 per year off-campus (beneficiary must be enrolled at least half time)

• All expenses listed for the prior tax years above
• However, room and board post secondary expenses are the maximum allowed for calculating costs of attendance for Financial Aid Programs
• Special needs services for beneficiaries enrolled in special needs schools
• Expenses incurred by certain elementary and secondary schools (i.e. tuition, fees, academic tutoring, special needs services, books, supplies, uniforms, supplementary items and equipment for public, private, or religious schools)
• Extended day care program expenses
• Computer technology, equipment or Internet Access to be used by the beneficiary while in school

What is a Non-Qualified Distribution?
A non-qualified distribution is any distribution other than a qualified education expense. When a non-qualified distribution is taken, a ratio of contributions and earnings is withdrawn. The earnings portion is then subject to taxes and a 10% penalty. Distributions made on account of death, disability, or scholarship are not subject to the 10% penalty. However, the earnings portion of such distributions is taxable.

Can I move funds from my Traditional or Roth IRA into an Education Savings Account?
Unfortunately no. You can, however, roll funds over from one ESA into a second ESA established for the same child. Also, you have the ability to roll an ESA into another ESA with a new designated beneficiary who is a member of the same family (as defined by law). That way, if a child decides not to pursue his or her education, the account can be transferred to a relative who does.

How do I find out more about Education Savings Accounts?
Simply see a Customer Service Representative at any Peoples First branch location. We will explain the nature of these accounts in more detail and help you complete the simple forms necessary to establish your ESA.

For additional information, please contact the IRA Coordinator at (800) 624-9699 or (850) 770-7000 in Panama City, FL.