Definitions for "Education Savings Account"
a savings account into which you and your children can contribute
Originally this type of account was established by the Internal Revenue Service, and because of the contribution and taxation guidelines associated with it, was defined as an Educational IRA. However, since the money must be used for educational purposes, rather than for retirement, the account type was renamed Education Savings Accounts, to more accurately reflect their purpose. These accounts allow individuals to contribute up to a certain dollar amount each year to an account established in the name of a minor, through the age of 18, with the funds to be used for educational purposes. The money may be used for elementary, secondary, or higher education purposes (restrictions apply). See IRS Publication 590 for more information.
This newly established (1998) IRA allows a related taxpayer to deposit up to $500 per year for each child under the age of 18. Interest earned on this type of IRA will be tax-free. In addition, withdrawals from an Education IRA will be tax-free as long as the withdrawals are used for educational expenses. The maximum contribution to an Education IRA is reduced on a pro-rata basis for single taxpayers with income of $95,000-$110,000 and joint taxpayers with income of $150,000-$160,000. Above the maximum income level, the allowed contribution is zero.