After the birth of my second child, my husband and I opened 529 College Savings Accounts and Coverdell Education Savings Accounts (ESAs) to save for college and pre-college educational expenses, respectively. Under current laws, 529s can only be used for post-secondary educational expenses whereas ESAs can be used for K-12 as well as post-secondary educational expenses. Additionally, you could contribute to both accounts up to the maximum without penalty.
All that is about to change on December 31, 2010 when the current laws governing ESAs expire.
As it stands, you can contribute a maximum of $2,000/year to an ESA in addition to making annual contributions to a 529 account for the same beneficiary. Additionally, you can make your annual contribution up to April 15 following the preceding tax year (like an IRA), use the funds for any qualified educational expense (K through post-secondary) and you are eligible for a Hope or Lifetime Learning tax credit in the same year and ESA withdrawal is made.
If the law is permitted to expire at the end of the year: the annual contribution limit goes down to $500; contributions must be made by December 31 of the same tax year; ESA funds may only be used for post-secondary educational expenses; no Hope or Lifetime Learning tax credit; and you can not contribute to both an ESA and a 529 lest your ESA contributions be subject to a 6% excise tax. There is no grandfathering of any kind for those who have an ESA prior to December 31, 2010, so in essence, you can not use the funds for any K through 12 educational expenses. So, if you started an ESA for the purpose of covering elementary and secondary educational expenses, as my husband and I did, unless the law is changed, you will not be able to use it for anything other than post-secondary educational expenses.
As of this writing, there is no pending legislation either in the House or Senate to either extend or make the current ESA laws permanent. I am urging Kossacks to contact their congresscritters to sponsor and or support the extension of the current ESA laws. This is an educational savings vehicle that is worth keeping.
Thanks for reading, and call your congresscritters!