Tax-Advantaged Options

Tax Advantaged Options

With both ESAs and 529 plans, earnings may be tax-free as long as withdrawals are used to pay for qualified education expenses.

ESAs

An ESA allows for after-tax contributions of up to $2,000 each year, which amount will be reduced to $500 each year starting in 2013, on behalf of the child named in the account. You may be able to forego federal income taxes when you withdraw funds to pay for qualified education expenses at an eligible elementary or secondary school (through Dec. 31, 2012, only) or a post-secondary educational institution. For a list of qualified expenses, refer to IRS Publication 970 at irs.gov or talk with your financial professional.

Qualified ESA distributions may not be subject to state and local taxation in most states. Funds must be withdrawn for qualified expenses or rolled into another eligible family member’s ESA or 529 plan before the beneficiary’s 30th birthday to avoid income taxes and a 10% IRS penalty. The earnings portion of withdrawals not used for qualified expenses is subject to an IRS penalty and taxes unless an exception applies. If the beneficiary dies or becomes disabled, you may make account distributions penalty-free. If the student receives a tax-free scholarship, withdrawals up to the amount of the scholarship may be made penalty-free within the same calendar year.

Eligibility

Your eligibility to contribute to an ESA is based on your modified adjusted gross income (MAGI). Single taxpayers whose MAGI is less than $95,000 and joint taxpayers whose MAGI is less than $190,000 can make the full $2,000 nondeductible contribution. The allowable contribution is lowered for single taxpayers whose MAGI is between $95,000 and $110,000 and for joint filers whose MAGI is between $190,000 and $220,000. If your MAGI exceeds these limits, you cannot contribute. Keep in mind that the total of all contributions to all ESAs set up for the benefit of any one beneficiary cannot exceed $2,000 per year.

If you are ready to become an independent advisor, Summit Brokerage can show you how. Visit www.joinsummit.com or contact us at (800) 354-5528

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