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Education Saving

Resources: Education Saving: Education Savings Account

A Coverdell Education Savings Account (ESA) is an investment vehicle that works much like a Roth IRA. Contributions are made to the account with after-tax dollars, and earnings grow free of federal taxes. Contributions and earnings may be withdrawn federally tax-free if used for qualified education expenses. The main features of ESAs are listed below:

Coverdell Education Savings Accounts (ESAs)
BenefitsAdditional Considerations
Investment flexibilityContribution limited to $2,000 per student, per year
Qualified distributions are federally tax-freeMaximum income limitations for donor(s)
Proceeds can be used for K–12 grades or higher education, public and private schools Beneficiary must generally use by age 30 or transfer or distribute
Broad education expense definitionGenerally, no state income tax savings
Proceeds can be used in any state-
Donor has some control over account proceeds-
Flexible transfer options-
No donor earned income minimum-
Counted as parents' assets for financial aid purposes-

Rules for ESAs

The Economic Growth and Tax Relief Reconciliation Act of 2001 created a number of enhancements to ESAs that make them a more effective saving tool.

Contributions:

  • You may contribute up to $2,000 per child per year.
  • Contributions may be made by single filers with income up to $110,000 (phases out between $95,000 and $110,000) and joint filers with combined income up to $220,000 (phase-out between $190,000 and $220,000).
  • Contributions can be made up to April 15 of the following year.
  • Contributions may be made to ESAs and 529 plans during the same year without triggering a 6% excise tax.

Withdrawals:

  • Qualified withdrawals may be used for educational expenses at the elementary and secondary (K-12) level, as well as college. Public, private, or religious school costs may qualify.
  • Federally tax-free withdrawals from an ESA can be taken in the same year in which a Hope or lifetime learning credit is claimed (as long as they are used for separate expenses).

With an ESA funded with Principal Investors Funds, you can select among highly diversified "fund of funds" portfolios or individual equity, fixed-income, and money market funds.

Low Investment Minimums and Automatic Investment Plans

ESA's allow you to invest with a minimum initial investment of $1,000 or $100 with $100 systematic purchases.

 

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To obtain a prospectus, download online or call Sales Support at 1.800.787.1621

While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that The Principal® is not rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements. For more information about our funds, including their full names, please see the Principal Funds, Inc. prospectus or call Sales Support at 1.800.787.1621.

Investing involves risk, including possible loss of principal.

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