Accordingly, ESAs may significantly benefit minors. Although more than one ESA can be set up for each child, the total annual contribution of all ESA contributions for any one child cannot exceed $2,000. Although contributions are not tax-deductible, distributions may be tax-free if certain conditions are satisfied. Contributions to an ESA do not reduce the annual per person limit for the Roth IRA and traditional IRAs.
ESAs may adversely affect the beneficiary's eligibility for financial aid.
If the designated beneficiary no longer needs the ESA, before the beneficiary reaches age 30, the ESA may be rolled over to a sibling or other qualified family member.
Distributions
Distributions from an ESA are tax-free, provided they are used for qualified higher-education expenses prior to the time the beneficiary reaches the age of 30. Qualified higher-education expenses for an ESA include primary and secondary school (grades K-12) expenses. Primary and secondary school expenses include costs for tutoring and for computers. The named beneficiary may be changed or the account rolled over, prior to his or her reaching the age of 30, to the beneficiary's family member, such as a spouse, child, or sibling. Distributions not used for qualified education expenses or not part of a qualified rollover are subject to income tax and a 10% federal income tax penalty. Qualified ESA distributions may be subject to state and local taxes, depending on your state. You should consult your tax advisor for more information.
Note: Unless Congress acts, the provisions related to ESAs revert to 2001 law as of 2013. This will result in lower income limits for married taxpayers to be eligible to make contributions, contribution limits drop to $500 per year and use will be limited to post secondary education expenses.