By Sarah Brenner, JD
Director of Retirement Education
The upcoming school year for many students is going to look like nothing we have ever seen before. For many, computers and related technology will become an indispensable part of academic life. This means that having reliable equipment and internet access is more important than ever. For many families this is just another unexpected expense in a pandemic economy. Here is how an ESA could help.
How ESAs Work
Coverdell Educations Savings Accounts (ESAs) are tax favored accounts designed for saving for education expenses. The maximum contribution amount is $2,000 per year for each designated beneficiary. The contributor does not have to be a parent.
While ESA contributions are not tax deductible, distributions (including earnings on the contributions) used for “qualified education expenses” are tax and penalty-free. Many people contribute to ESAs to save for college. However, ESA qualified education expenses are much broader than just college tuition. The expenses can be college expenses, but they also can include grade school and high school expenses.
Tax-free ESA Distributions for Computer-Related Expenses
With many colleges and K-12 schools going completely or partially virtual for the 2020-2021 academic year, access to technology is more important than ever. Fortunately, the definition of qualified education expenses for ESAs includes technology related expenses such as computer equipment, software and internet. Now may be the time to tap your ESA for a technology upgrade. Because these expenses are considered qualified education expenses, there are no tax or penalty consequences.
Example: Emily and Ashley are sisters. Their grandmother has been contributing to an ESA for each of them for a few years. Emily will be a junior in high school this year and Ashley will be starting her first year of college. Both girls’ schools have announced that they will be virtual in the fall. Distributions can be taken from each girl’s ESA to purchase new laptops, any software or other computer equipment needed, and internet access. These distributions would be tax and penalty-free.