IMPORTANT UPDATE TO THE T. ROWE PRICE EDUCATION SAVINGS ACCOUNT DISCLOSURE STATEMENT AND CUSTODIAL AGREEMENT

Transcription

1 IMPORTANT UPDATE TO THE T. ROWE PRICE EDUCATION SAVINGS ACCOUNT DISCLOSURE STATEMENT AND CUSTODIAL AGREEMENT As a result of potential Coverdell Education Savings Account (ESA) related tax law changes on January 1, 2013, we have made changes to the T. Rowe Price Education Savings Account Disclosure Statement and Custodial Agreement (ESA Summary & Agreement) dated September 1, 2005, and the Supplement dated July 1, This update is effective October 24, You should review this information carefully and keep it with your current copy of the ESA Summary & Agreement. Effective January 1, 2012, we will no longer accept contributions, rollovers, or transfers to a new or existing T. Rowe Price ESA. You will be permitted to make changes to your Investment Options, Beneficiary(ies), and Successor Beneficiary(ies), as well as take distributions from your ESA. The Contributing to a T. Rowe Price ESA Account and Rollovers and Transfers sections of the Disclosure Statement and the following sections of the Custodial Agreement are amended to reflect these changes: Section 2.01 Regular Contributions. Effective January 1, 2012, no person shall be permitted to make a contribution to the ESA. Section 2.02 Rollover Contributions. Effective January 1, 2012, no person shall be permitted to make a contribution to the ESA from any portion of a distribution from an ESA. Section 2.03 Transfers. Effective January 1, 2012, the custodian may not accept amounts transferred to the ESA from the trustee or custodian of another Coverdell Education Savings Account K /11

2 Important Changes to the T. Rowe Price Education Savings Account Disclosure Statement and Custodial Agreement Effective August 1, 2011, please review the changes to policy as listed in the supplement below. If you have any questions, please call us at T. Rowe Price Education Savings Account Disclosure Statement and Custodial Agreement Supplement dated July 1, 2011 The following information updates the T. Rowe Price Education Savings Account Disclosure Statement and Custodial Agreement ( ESA Disclosure Statement and Custodial Agreement ) dated September 1, You should review this information carefully and keep it with your current copy of the ESA Disclosure Statement and Custodial Agreement. These updates are effective August 1, The following replaces the information in the Disclosure Statement under Contributing to a T. Rowe Price ESA Account Minimum Initial Investment: Contributing to a T. Rowe Price ESA Account Minimum Initial Investment The minimum initial contribution to a T. Rowe Price ESA is $1,000 per mutual fund. Thereafter, systematic contributions may be made through Automatic Asset Builder (i.e., automatic debits from a bank account or payroll deductions from your employer). Automatic

3 Asset Builder requires a minimum subsequent investment of $100 per transaction per mutual fund. Any subsequent contributions to a T. Rowe Price ESA must be at least $100 per mutual fund. The following replaces the information in the Disclosure Statement under FEES: FEES An annual account service fee of $20 will be charged for each T. Rowe Price mutual fund account with a balance below $10,000. The annual account service fee will be automatically deducted from the account s assets. Waivers for this fee may apply, as described in the T. Rowe Price Funds prospectus. If a T. Rowe Price ESA is closed during the year, a $20 closeout fee will be deducted automatically from the proceeds of the distribution from each mutual fund account unless, at the time of redemption, the annual account service fee previously was paid for that year. This fee applies regardless of the value of the fund investments. These thresholds and fee amounts are subject to change. Section 6.03 Custodian Fees and Expenses in the Custodial Agreement is replaced with the following: The Custodian shall be entitled to such fees for maintaining and administering the ESA as it may establish from time to time. The Custodian may change its fees hereunder at any time upon 30 days written notice to the Authorized Person. All such fees and all other expenses incurred in maintaining the ESA shall be charged to the Account, and Fund shares will be liquidated to pay such fees K /11

4 T. ROWE PRICE EDUCATION SAVINGS ACCOUNT DISCLOSURE STATEMENT AND CUSTODIAL AGREEMENT CONTENTS Disclosure Statement 5-16 Custodial Agreement (Effective Date September 1, 2005)

5 T. ROWE PRICE PRIVACY POLICY T. Rowe Price recognizes the importance of protecting your personal and financial information when you visit our Web site. In the course of doing business with T. Rowe Price, you share personal and financial information with us. We treat this information as confidential and recognize the importance of protecting access to it. You may provide information when communicating or transacting with us in writing, electronically, or by phone. For instance, information may come from applications, requests for forms or literature, and your transactions and account positions with us. On occasion, such information may come from consumer reporting agencies and those providing services to us. We do not sell information about current or former customers to any third parties, and we do not disclose it to third parties unless necessary to process a transaction, service an account, or as otherwise permitted by law. We may share information within the T. Rowe Price family of companies in the course of providing or offering products and services to best meet your investing needs. We may also share that information with companies that perform administrative or marketing services for T. Rowe Price, with a research firm we have hired, or with a business partner, such as a bank or insurance company, with whom we are developing or offering investment products. When we enter into such a relationship, our contracts restrict the companies use of our customer information, prohibiting them from sharing or using it for any purposes other than those for which they were hired. We maintain physical, electronic, and procedural safeguards to protect your personal information. Within T. Rowe Price, access to such information is limited to those who need it to perform their jobs, such as servicing your accounts, resolving problems, or informing you of new products or services. Our Code of Ethics, which applies to all employees, restricts the use of customer information and requires that it be held in strict confidence. This Privacy Policy applies to the following T. Rowe Price family of companies: T. Rowe Price Associates, Inc.; T. Rowe Price Advisory Services, Inc.; T. Rowe Price Investment Services, Inc.; T. Rowe Price Savings Bank; T. Rowe Price Trust Company; and the T. Rowe Price Funds.

6 T. Rowe Price Education Savings Account Basic Facts Contributions Distributions Contributor Income Qualifications Qualified Educational Expenses Account Control Nondeductible contributions totaling $2,000 a year per Beneficiary; contributions for a tax year can be made until the tax return due date, not including extensions (typically April 15). Federally tax-free and penalty-free if used for Qualified Educational Expenses For single filers, ESA modified adjusted gross income ( MAGI ) of $110,000 or less; for married couples, ESA MAGI of $220,000 or less; entities are not subject to ESA MAGI requirements May be used for elementary and secondary schools, as well as colleges and other post-secondary schools Authorized Person (any person with a valid Social Security number or United States-issued taxpayer identification number) maintains control of the account 1

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8 TABLE OF CONTENTS Disclosure Statement I. Overview What is an ESA? How is a T. Rowe Price ESA Structured? Definitions of Terms II. Opening and Maintaining a T. Rowe Price ESA Account Customer Identification Verification Authorized Persons and Successor Authorized Persons Beneficiaries and Successor Beneficiaries III. Contributing to a T. Rowe Price ESA Account Maximum Annual Contribution Limit and Age Restriction Minimum Initial Investment Permissible Investments and Notice Regarding Recommended Investments Contribution Deadline for a Tax Year ESA Contributions From an UGMA/UTMA Eligibility to Contribute Excess Contributions Confirmation of Contributions IV. Qualified Education Expenses Eligible Educational Institutions Qualified Education Expenses (Generally) Qualified Higher Education Expenses Qualified Elementary and Secondary School Expenses V. Distributions and Taxation Distributions at Age 30 (Deemed Distributions) Losses on ESA Investments Penalty Tax VI. Rollovers and Transfers Rollovers Transfers VII. Death of Authorized Person or Beneficiary Death of Authorized Person Death of Beneficiary VIII. Fees

9 IX. Coordination with Other Education Incentives Qualified Tuition Programs (529 Plans) Hope and Lifetime Learning Credits Financial Aid X. Miscellaneous Investment Performance Not Guaranteed Account Termination ESA Tax Forms State Tax Treatment Additional Information Custodial Agreement Article I General Information Article II Contributions, Rollovers, and Transfers Article III Limitations on Contributions Article IV Investments Article V Distributions Article VI Administration Article VII Amendment Article VIII Resignation or Removal of Custodian Article IX Termination of the ESA Article X Miscellaneous T. Rowe Price Investor Centers

10 T. ROWE PRICE TRUST COMPANY EDUCATION SAVINGS ACCOUNT DISCLOSURE STATEMENT OVERVIEW This Disclosure Statement is provided to each person who establishes a Coverdell education savings account ( Education Savings Account or ESA ) with T. Rowe Price Trust Company ( T. Rowe Price ). T. Rowe Price reserves the right to amend this Disclosure Statement at any time by written communication to persons who establish an ESA with T. Rowe Price. The most recent version of this Disclosure Statement supersedes any prior versions. The rules and policies described in this Disclosure Statement are effective September 1, Keep in mind that state income tax treatment may vary. Therefore, this Disclosure Statement discusses only the federal tax treatment of Education Savings Accounts. The Authorized Person and initial contributor (if different from the Authorized Person) should read this Disclosure Statement and Custodial Agreement carefully. Also, please review the prospectus for any mutual fund that you select for your T. Rowe Price ESA. Each fund s prospectus includes investment objectives, risks, fees, expenses, and other information you should read and consider carefully before investing. You may not invest your T. Rowe Price ESA in individual securities through T. Rowe Price Brokerage or Certificates of Deposits through the T. Rowe Price Savings Bank. On July 26, 2001, a federal law changed the name of the Education individual retirement account ( Education IRA ) to the Coverdell education savings account. This T. Rowe Price Education Savings Account Disclosure Statement and Custodial Agreement replaces all previous T. Rowe Price Education IRA Disclosure Statements and Custodial Agreements, as well as all previous T. Rowe Price Education Savings Account Disclosure Statements and Custodial Agreements. Any T. Rowe Price account that was established as an Education IRA will be administered under the terms and conditions of this Disclosure Statement and Custodial Agreement. Significant changes, most of which became effective on January 1, 2002, occurred to ESAs as a result of the Economic Growth and Tax Relief Reconciliation Act of 2001 ( EGTRRA ). The rules and features in this Disclosure Statement reflect the current tax laws. However, due to the sunset provision of EGTRRA, certain modifications to ESAs may only be effective through 2010, unless Congress takes further action. If these EGTRRA provisions are not extended or made permanent, the laws governing ESAs will revert to the laws in existence prior to January 1, What is an ESA? Education Savings Accounts first became available in 1998 and are regulated under section 530 of the Internal Revenue Code. An ESA is a trust or custodial account created or organized in the United States for the exclusive purpose of paying a Beneficiary s Qualified Education Expenses. How is a T. Rowe Price ESA Structured? T. Rowe Price serves as the custodian of the ESA. Each ESA account must have one Authorized Person and one Beneficiary. An ESA is established to pay the Beneficiary s Qualified Education Expenses but is controlled by the Authorized Person. The Authorized Person can be changed at any time and the Beneficiary can be changed to another family member of the Beneficiary at any time. However, if the ESA was funded from an account created under the Uniform Gift to Minors Act or Uniform Transfer to Minors Act of any state ( UGMA/UTMA ), the Beneficiary cannot be changed while still alive. 5

11 DEFINITIONS OF TERMS Certain terms used throughout this Disclosure Statement are capitalized. Additional terms are capitalized in the Custodial Agreement and defined therein. Capitalized terms used in this T. Rowe Price Trust Company Education Savings Account Disclosure Statement have the following meanings and are described in greater detail later in this document: Authorized Person: the person who establishes a T. Rowe Price Education Savings Account on behalf of a Beneficiary and controls the account until replaced. Beneficiary: the individual for whose benefit the ESA is established in order to pay his or her educational expenses. Education Savings Account or ESA: a Coverdell education savings account within the meaning of section 530 of the Internal Revenue Code (26 U.S.C. 530). Eligible Educational Institution: as defined by 26 U.S.C. 530(e)(5) and 530(b)(4)(B), an elementary, secondary, or post-secondary school for which expenses may be considered qualified for purposes of an ESA. Qualified Education Expenses: as defined by 26 U.S.C. 530(b)(2), qualified expenses incurred by an ESA Beneficiary in connection with attendance or enrollment at an Eligible Educational Institution. Successor Authorized Person: a person designated to become the Authorized Person if the Authorized Person dies or is declared legally incapacitated. Successor Beneficiary: an individual designated by the Authorized Person to receive the benefit of the ESA if the Beneficiary dies. OPENING AND MAINTAINING A T. ROWE PRICE ESA ACCOUNT Customer Identification Verification To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account. When opening an ESA, T. Rowe Price will ask for the name, residential street address, date of birth, and Social Security number or taxpayer identification number for the Authorized Person (and any individual opening an ESA account on behalf of the Authorized Person, such as an agent under power of attorney). This information is necessary to properly verify the identity of the person(s) opening the account. If we do not receive all of the required information, your account may not be opened or there could be a delay in opening the account. We will use this information to verify the identity of the Authorized Person and any individuals opening the Account on behalf of the Authorized Person. If, after making reasonable efforts, we are unable to verify the Authorized Person s or other individuals identities, the USA PATRIOT Act requires us to take certain actions, including closing the account and redeeming the account at the net asset value (NAV) calculated the day the account is closed. Any ESA redemption made under these circumstances may be subject to taxes and penalties because it was not used for Qualified Education Expenses. Authorized Persons and Successor Authorized Persons A T. Rowe Price ESA must be established and controlled by an Authorized Person. The Authorized Person may be any person with a valid Social Security number or United Statesissued taxpayer identification number. The Authorized Person is responsible for investment decisions, distribution requests, rollovers, Beneficiary changes, and any other account transac- 6

12 tions or maintenance. Certain transactions between the Beneficiary (or on the Beneficiary s behalf) and the ESA are prohibited (e.g., a loan from the ESA to the Beneficiary). The Authorized Person will generally maintain control over the ESA until it is distributed. The Authorized Person can transfer control to the Beneficiary once the Beneficiary has reached the age of majority under Maryland law (currently 18 years of age), or to another person at any time. This transfer of control is not automatic and must be requested in writing. Until such written notice is received in good order and accepted by T. Rowe Price, the Authorized Person remains in control of the Account. Each ESA account can have only one Authorized Person, but Authorized Persons may name Successor Authorized Persons for accounts. If the current Authorized Person dies or is declared legally incapacitated, the Successor Authorized Person will become the Authorized Person. The Authorized Person may designate a Successor Authorized Person at the time the account is established or at a later date. The most recent Successor Authorized Persons that are designated for a T. Rowe Price ESA will apply to all T. Rowe Price ESAs with the same Authorized Person and Beneficiary. In order for any Successor Authorized Person designation to be effective, it must be made in writing and it must be received and accepted by T. Rowe Price before the death or declaration of legal incapacitation of the Authorized Person. Beneficiaries and Successor Beneficiaries The Beneficiary is the individual for whom the ESA is established and he or she is expected to receive the benefit of the ESA assets. The account is generally considered an asset of the Beneficiary, but it is controlled by the Authorized Person. The Beneficiary must be an individual (not a trust or other entity) with a valid Social Security number or United States-issued taxpayer identification number. When the ESA is established, the Beneficiary must be under age 18 or considered a special needs Beneficiary. Final regulations defining a special needs Beneficiary have not yet been released. A special needs Beneficiary is expected to include an individual who because of a physical, mental, or emotional condition (including a learning disability) requires additional time to complete his or her education. Each ESA account can have only one Beneficiary, but Authorized Persons may establish multiple accounts for a Beneficiary and may name Successor Beneficiaries for each account. The Authorized Person may designate a Successor Beneficiary at the time the account is established or at a later date. If the Beneficiary dies, the ESA can be rolled over tax-free to a Successor Beneficiary, provided certain conditions are met. In order to receive the ESA assets, a Successor Beneficiary must be under age 30 or a special needs Beneficiary, as well as a member of the family of the deceased Beneficiary. A member of the family or family member is defined by the Internal Revenue Code and is described below. The Authorized Person may change the Beneficiary to another family member of the current Beneficiary at any time while the Beneficiary is still alive. The new Beneficiary may or may not be one of the designated Successor Beneficiaries. If such a change occurs, any Successor Beneficiary designation will not automatically carry over to the ESA account for the new Beneficiary. For purposes of Beneficiary changes while the Beneficiary is still alive, rollovers to other Beneficiaries (discussed later), and a Successor Beneficiary s entitlement to a deceased Beneficiary s ESA, a member of the family means an individual who is related to the Beneficiary as follows: (1) A son or daughter, or a descendant of either; (2) A stepson or stepdaughter; (3) A brother, sister, stepbrother, or stepsister; (4) The father or mother, or an ancestor of either; (5) A stepfather or stepmother; 7

13 (6) A son or daughter of a brother or sister; (7) A brother or sister of the father or mother; (8) A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sisterin-law; (9) The spouse of the Beneficiary or the spouse of any individual described in 1 through 8; or (10) A first cousin of the Beneficiary. If more than one Successor Beneficiary has been named, the ESA will be rolled over to each Successor Beneficiary in the designated proportions. If a Successor Beneficiary is deceased or ineligible to receive a rollover, the amounts due any deceased or ineligible Successor Beneficiaries will be reallocated to the other living, eligible Successor Beneficiaries in accordance with the indicated proportions. If a Successor Beneficiary has not been named, or if all Successor Beneficiaries are deceased or ineligible to receive a rollover, ESA assets will be distributed to the estate of the Beneficiary. The most recent Successor Beneficiary(ies) that are designated for a T. Rowe Price ESA will apply to all T. Rowe Price ESAs with the same Authorized Person and Beneficiary. In order for any Successor Beneficiary designation to be effective, it must be made in writing and it must be received and accepted by T. Rowe Price before the death of the Beneficiary. CONTRIBUTING TO A T. ROWE PRICE ESA ACCOUNT Maximum Annual Contribution Limit and Age Restriction Contributions to an ESA are not tax deductible, but any growth is tax-deferred and distributions are potentially tax-free. A contribution to an ESA is treated as a completed gift from the contributor to the Beneficiary for federal gift tax purposes. Contributions to an ESA must be made before the Beneficiary reaches age 18 unless the Beneficiary is a special needs Beneficiary. There is no limit to the number of separate ESAs that can be established for a Beneficiary. However, total contributions to all ESAs for a Beneficiary cannot exceed $2,000 per tax year, regardless of the number of ESAs funded at different custodians and by different persons. The maximum annual contribution amount does not include rollovers or transfers. T. Rowe Price will issue Internal Revenue Service ( IRS ) Form 5498-ESA for any tax year that contributions are made to a T. Rowe Price ESA. Form 5498-ESA will show the total amount of ESA contributions for the tax year and will be furnished to the Authorized Person and the IRS. Minimum Initial Investment The minimum initial contribution to a T. Rowe Price ESA is $1,000 per mutual fund, unless systematic contributions are made through Automatic Asset Builder (i.e., automatic debits from a bank account or payroll deductions from your employer). Automatic Asset Builder requires a minimum investment of $50 per mutual fund per month. Any subsequent contributions to a T. Rowe Price ESA must be at least $50 per mutual fund. Permissible Investments and Notice Regarding Recommended Investments Contributions to a T. Rowe Price ESA may be invested in any of the mutual funds managed by T. Rowe Price Associates, Inc., except funds that have been closed to new investors. T. Rowe Price tax-free and tax-efficient funds are likely not appropriate investments for an ESA given the tax implications of such funds. Contributions to a T. Rowe Price ESA must be in cash or a cash equivalent (e.g., a check, money order, or bank account debit) as acceptable to T. Rowe Price. Contributions of property such as stock or real estate, or investments in life insurance contracts, are not allowed. 8

14 If you invest a T. Rowe Price ESA in a mutual fund that has been recommended to you by T. Rowe Price Investment Services, Inc., you are deemed to have agreed to the following important information: You understand that only a limited number of the mutual funds that are managed by T. Rowe Price Associates, Inc. ( Funds ) are being considered for recommendation to you and that each Fund pays fees to affiliates of T. Rowe Price. You understand that purchases and redemptions of Fund shares are subject to the terms of the current Fund prospectus, including redemption fees designed to discourage short-term trading. You acknowledge that T. Rowe Price Investment Services, Inc. has provided a prospectus for the Fund recommended to you and that it is your responsibility to carefully read it, as it describes the Fund s fees and expenses. Although T. Rowe Price Investment Services, Inc. will recommend a Fund it deems to be suitable, such Funds are subject to market risk, as described in each Fund s prospectus. You understand that, as with any investment in stocks, bonds or mutual funds, you could lose money. T. Rowe Price Investment Services, Inc. cannot guarantee any rate of return for each recommended Fund. You understand that the Fund recommendation is made at the point in time when T. Rowe Price Investment Services, Inc. collected your information and that the recommendation may not be appropriate if your situation changes. You understand that T. Rowe Price Investment Services, Inc. will not monitor your investments and is not obligated to update the recommendation. Unless you request an updated or subsequent recommendation, the information that T. Rowe Price Investment Services, Inc. collected about you will not be considered by its associates when servicing or performing transactions in your account or discussing your investments with you in the future. Contribution Deadline for a Tax Year Contributions to an ESA for a tax year must be made no later than the tax return due date for that tax year (generally April 15), excluding extensions. A contribution sent by check or money order will be credited for the previous tax year at your specific written request only if it is postmarked by the tax return due date, excluding extensions. Unless you inform T. Rowe Price in writing the year for which a contribution should be credited, T. Rowe Price will assume it is for the year in which it is received by T. Rowe Price. You may also choose to redeem from other T. Rowe Price accounts to fund an ESA contribution. Please be aware that gains on such redemptions may be includible in gross income and subject to income taxes. If you are redeeming from another T. Rowe Price account to fund an ESA contribution that is to be credited for the prior tax year, your request must be received (as opposed to merely being postmarked) by the tax return due date, excluding extensions. ESA Contributions From an UGMA/UTMA If you are redeeming from an UGMA/UTMA to fund an ESA, the minor on the UGMA/UTMA must also be named as the Beneficiary for the ESA account. The registration for the ESA account will have a special notation that indicates that it was funded with UGMA/UTMA proceeds. The Beneficiary for UGMA/UTMA-funded T. Rowe Price ESA accounts cannot be changed while the Beneficiary is still alive. If additional ESA contributions are made for the Beneficiary that did not originate from an UGMA/UTMA, it is important to set up a separate ESA account so that you retain the ability to change the Beneficiary for those contributions and earnings. Eligibility to Contribute Generally, anyone (including the Beneficiary) meeting the ESA modified adjusted gross income (MAGI) requirements can contribute to an ESA, as long as the total annual contributions for a particular Beneficiary do not exceed $2,000. No family relationship is required between the contributor and the Beneficiary. Unlike Traditional and Roth IRAs, earned income is not required in order to make an ESA contribution. Corporations and other entities, including tax-exempt organizations, are permitted to make contributions to ESAs, regardless of the income of the entity during the year of the contribution. 9

15 For most personal income taxpayers, MAGI is the same as adjusted gross income (AGI) as figured on their federal income tax return. If you file Form 1040A, MAGI will be the same as AGI. If you file Form 1040, MAGI is AGI, modified by adding back any: Foreign earned income exclusion; Foreign housing exclusion; Exclusion of income for bona fide residents of American Samoa; and Exclusion of income from Puerto Rico. Contributors can contribute up to $2,000 for each Beneficiary if their MAGI falls below certain limits. The MAGI requirements for making a maximum annual ESA contribution are as follows: For single taxpayers, MAGI must be $95,000 or below; For married taxpayers filing jointly, MAGI must be $190,000 or below; and Entities are not subject to MAGI limitations. Contributors are not eligible to contribute to an ESA if their MAGI is above certain limits. The MAGI levels that make a taxpayer ineligible to make any ESA contribution are as follows: For single taxpayers, MAGI is $110,000 or above; For married taxpayers filing jointly, MAGI is $220,000 or above; and Married taxpayers filing separately are never eligible to make ESA contributions. A contributor s maximum contribution limit for a Beneficiary is gradually reduced for individuals whose MAGI is between $95,000 and $110,000 (and for married and joint filers with MAGI between $190,000 and $220,000). If ESA MAGI falls within these ranges, the permissible contribution amount is determined proportionately. For example, if a married taxpayer filing jointly has MAGI of $205,000, the exact midpoint of the range, a contribution of $1,000 (instead of $2,000) would be allowed. IRS Publication 970 contains worksheets and examples to help contributors determine their permissible ESA contribution if their MAGI falls within these ranges. Excess Contributions The Beneficiary must pay a 6% excise tax each year on excess contributions that are in an ESA at the end of the year. Properly executed rollover contributions in excess of $2,000 are not subject to this tax. Excess contributions are the total of the following two amounts: 1. Contributions and improper rollovers (e.g., a rollover that is completed after 60 days) into a Beneficiary s ESAs that exceed $2,000 for the year (or less if the total of each contributor s limit for the year is less); and 2. Excess contributions for the preceding year, reduced by the total of the following two amounts: distributions (other than those properly rolled over) during the year and the contribution limit for the current year minus the amount contributed for the current year. Excise taxes can be avoided by withdrawing any excess contribution and related earnings before June 1 of the year following the tax year in which the contribution was made. However, the Beneficiary must include the distributed earnings in gross income for the year in which the excess contribution was made. T. Rowe Price will issue IRS Form 1099-Q reflecting the amount of earnings attributable to the excess contribution that was distributed. IRS Publication 970 contains worksheets and examples to help determine the amount of any excess contribution for a year and how to calculate the excise tax associated with it. 10

16 Confirmation of Contributions After receiving a contribution in good order, T. Rowe Price will send you a confirmation (except for contributions through Automatic Asset Builder, which are shown on each quarterly statement). A contributor who is not the Authorized Person will not receive confirmations or statements unless otherwise requested in writing by the Authorized Person. QUALIFIED EDUCATION EXPENSES The Authorized Person may request a distribution at any time. However, if the distribution is not used to pay Qualified Education Expenses, the earnings may be subject to a federal penalty tax as well as federal and state income taxes. It is the responsibility of the taxpayer to substantiate to the IRS that a distribution was used for Qualified Education Expenses. T. Rowe Price does not make that determination. Eligible Educational Institutions Qualified Education Expenses are generally expenses that are related to enrollment or attendance at an Eligible Educational Institution. For purposes of an ESA, an Eligible Educational Institution can be either an eligible post-secondary school (higher education) or an eligible elementary or secondary school (kindergarten through 12th grade). An eligible post-secondary school is generally an institution that offers credit toward a bachelor s degree, an associate s degree, a graduate level or professional degree, or another recognized post-secondary credential. This is any college, university, vocational school, or other postsecondary educational institution eligible to participate in student aid programs administered by the U.S. Department of Education. It includes virtually all accredited, public, nonprofit, and proprietary (privately owned profit-making) post-secondary institutions. Certain post-secondary vocational institutions also qualify. The institution should be able to tell you if it is an Eligible Educational Institution. Certain post-secondary institutions located outside the United States also qualify because they participate in the U.S. Department of Education s Federal Student Aid programs. A list of participating foreign schools can be found on the U.S. Department of Education s Web site. An eligible elementary or secondary school is any public, private, or religious school that provides elementary or secondary education, as determined under state law. Qualified Education Expenses (Generally) Qualified Education Expenses are classified differently depending on whether distributions are used toward post-secondary school expenses or used toward elementary or secondary school expenses. Generally, distributions are tax-free if they do not exceed the amount of a Beneficiary s Qualified Education Expenses for the year. Total Qualified Education Expenses are reduced by any non-taxable educational assistance received by the Beneficiary. Non-taxable educational assistance includes the tax-free part of scholarships and fellowships, Veterans educational assistance, Pell grants, employer-provided educational assistance, and any other tax-free payments (other than gifts or inheritances) received as educational assistance. A distribution from an ESA that is used to make a contribution to a qualified tuition program (529 plan) is also considered a Qualified Education Expense, provided the Beneficiary of the ESA is the same as the beneficiary of the qualified tuition program account. Qualified Higher Education Expenses Qualified higher education expenses are expenses related to enrollment or attendance at a postsecondary Eligible Educational Institution. These expenses include tuition, fees, books, supplies, and equipment that are required by an Eligible Educational Institution for a student s enrollment or attendance. Qualified higher education expenses also include expenses for special needs services necessary for a special needs Beneficiary in connection with enrollment or attendance. Room and board costs may be considered Qualified Education Expenses if the student is enrolled on at least 11

17 a half-time basis. A half-time student must be enrolled for at least half the full-time academic workload for the course of study the student is pursuing, as determined under the standards of the school. The allowable room and board expenses qualify only to the extent that they do not exceed the greater of the following two amounts: 1. The allowance for room and board, as determined by the school, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangements of the student; or 2. The actual amount charged if the student is residing in housing owned or operated by the school. Qualified Elementary and Secondary School Expenses Qualified elementary and secondary education expenses are expenses related to enrollment or attendance at an elementary or secondary Eligible Education Institution. These expenses include tuition, fees, books, supplies, equipment, academic tutoring, and special services for a special needs Beneficiary incurred in connection with enrollment or attendance. Qualified elementary and secondary expenses also include room and board, uniforms, transportation, and supplementary items and services (including extended day programs) that are required or provided by the school. Also included are expenses for the purchase of certain computer technology or equipment, or Internet access and related services, if these items are to be used by the Beneficiary and Beneficiary s family during any of the years the Beneficiary is in school. Computer software designed for sports, games, or hobbies is not included unless the software is predominantly educational in nature. DISTRIBUTIONS AND TAXATION Any distribution from a T. Rowe Price ESA must be requested by the Authorized Person and received in good order by T. Rowe Price. T. Rowe Price cannot accept distribution instructions from the Beneficiary. To receive the full federal tax benefit of an ESA, distributions must be used to pay a Beneficiary s Qualified Education Expenses. A portion of a distribution is generally taxable to the Beneficiary if distributions for a year exceed the Beneficiary s Qualified Education Expenses for the year. T. Rowe Price will issue IRS Form 1099-Q for any year in which a distribution is taken from a T. Rowe Price ESA. Form 1099-Q will show the gross distribution, earnings, and basis and will be furnished to the Authorized Person and the IRS. IRS Publication 970 contains worksheets and examples to help taxpayers calculate the taxable portion of a distribution. If the Qualified Education Expenses for the Beneficiary are less than the total amount of the distributions, then the Qualified Education Expenses are paid from a pro-rata share of both principal and earnings. In this case, only a portion of the earnings is tax-free and the remaining portion of the earnings is includible in the Beneficiary s gross income. Distributions at Age 30 (Deemed Distributions) Any assets in an ESA must generally be distributed to the Beneficiary within 30 days after the Beneficiary reaches age 30, unless the Beneficiary is a special needs Beneficiary. Such a deemed distribution may be subject to income taxes and penalties, unless: 1) The distribution is rolled over to an ESA for a new Beneficiary who is a family member of the Beneficiary who reached age 30 (see the definition of family member on pages 7 and 8); 2) The new Beneficiary is under the age of 30 or considered a special needs Beneficiary; and 3) The rollover is completed within 60 days of the distribution. Losses on ESA Investments If you have a loss on your investment in an ESA, you may be able to take the loss on your income tax return. You can take the loss only when all amounts from that account have been 12

18 distributed and the total distributions are less than your unrecovered basis (i.e., total amount of contributions to that ESA). The loss is claimed as a miscellaneous itemized deduction on Schedule A, subject to the 2%-of-adjusted-gross-income limit. Penalty Tax Generally, if you receive a taxable distribution (i.e., a distribution not used toward Qualified Education Expenses), you must also pay a 10% federal penalty tax on the amount included in income. It is the responsibility of the taxpayer to calculate and remit the penalty tax to the IRS. IRS Publication 970 contains a worksheet on how to calculate the penalty tax. However, there are certain exceptions where the penalty does not apply despite a distribution not being used toward Qualified Education Expenses. Although income taxes may still be owed on earnings, the 10% penalty tax does not apply under the following circumstances: 1. Distributions are paid to the estate of the Beneficiary (or another Beneficiary) due to the death of the Beneficiary. 2. Distributions are the result of the Beneficiary being disabled. A person is generally considered disabled upon proof that he or she cannot do any substantial gainful activity because of a physical or mental condition of long-continued and indefinite duration. 3. The Beneficiary received a tax-free scholarship or fellowship, Veterans educational assistance, employer-provided educational assistance, or other non-taxable payments (other than gifts or inheritances) considered educational assistance. These exceptions apply only to the extent the ESA distribution amounts do not exceed the amounts of the scholarships, allowances, or payments. 4. Distributions are made on account of the attendance of the Beneficiary at a United States military academy (e.g., West Point). This exception applies only to the extent that the amount of the distribution does not exceed the costs of advanced education (as defined in Title 10 of the U.S. Code) attributable to such attendance. 5. Distributions are included in income only because the Qualified Education Expenses were taken into account in determining a Hope or Lifetime Learning credit. 6. Distributions are made before June 1 and represent a return of an excess contribution made in the prior year. The distributed earnings must be included in gross income for the year in which the excess contribution was made. ROLLOVERS AND TRANSFERS Rollovers Any amount distributed from an ESA is not taxable if it is rolled over to another ESA for the benefit of the same Beneficiary or a member of the Beneficiary s family (see the definition of family member on pages 7 and 8). The rollover can be made into an ESA with the same or a different custodian from which the amount was distributed. Unless the new Beneficiary is a special needs Beneficiary, the new Beneficiary must be under the age of 30. The rollover must be completed within 60 days after the date of the distribution to be considered a proper rollover. A rollover may be desirable in the following circumstances: 1. If there are funds remaining in the ESA when the Beneficiary reaches age If the Beneficiary will not be attending post-secondary school. 3. If the Beneficiary dies prior to age 30 and there are remaining assets in the ESA. 13

19 Only one tax-free rollover per ESA, regardless of whether the Beneficiary changes or remains the same, is allowed during the 12-month period ending on the date of the distribution. If the Authorized Person does not first request a distribution, there is no limit to the number of Beneficiary changes or direct transfers that can be completed. T. Rowe Price will issue IRS Form 5498-ESA for any tax year in which rollovers are made to a T. Rowe Price ESA. Unlike regular contributions, Form 5498-ESA only reflects rollover contributions into an ESA between January 1 and December 31. Form 5498-ESA will show the total amount of ESA rollover contributions during that calendar year and will be furnished to the Authorized Person and the IRS. Transfers The Authorized Person may instruct T. Rowe Price to transfer a T. Rowe Price ESA to an ESA with another custodian registered in the same Beneficiary s name. T. Rowe Price will also accept transfers of ESA assets from other financial institutions. For transfers, neither the Authorized Person nor the Beneficiary takes constructive receipt of the proceeds. There is no limit to the number of transfers that can be completed. To request a transfer, call T. Rowe Price at or visit troweprice.com to discuss the necessary steps. A Beneficiary s interest can be transferred to a former spouse or estranged spouse because of divorce or separation. If a former spouse or estranged spouse receives an ESA under a valid divorce or separation instrument, it is not a taxable transfer. After the transfer, the former spouse or estranged spouse treats the ESA as his or her own and as if he or she was the original Beneficiary. DEATH OF AUTHORIZED PERSON OR BENEFICIARY Death of Authorized Person If the Authorized Person dies, any named Successor Authorized Person will become the new Authorized Person. If the Authorized Person dies with no named Successor Authorized Person, but one of the Beneficiary s parents is still living and not incapacitated, then he or she will become the Authorized Person. If the Beneficiary s parents are either deceased or incapacitated, then the appointment of a new Authorized Person will be determined pursuant to Article 1.04 of the Custodial Agreement. Death of Beneficiary If the Beneficiary dies, the ESA will be rolled over to any eligible Successor Beneficiaries. If there are no eligible Successor Beneficiaries, the ESA will be paid to the estate of the Beneficiary. If the ESA is not then rolled over to another Beneficiary (who is a family member of the deceased Beneficiary) or distributed within 30 days of the death of the Beneficiary, the ESA will be deemed distributed by the IRS. FEES An annual fee of $10 will be charged for each T. Rowe Price mutual fund in a T. Rowe Price ESA. The annual fee can be prepaid or automatically deducted from the account s assets. However, the fee is waived if the mutual fund balance is $5,000 or greater at the time of fee billing. The fee is also waived for all ESAs of an Authorized Person if the aggregate balance of all of the Authorized Person s T. Rowe Price mutual fund accounts (ESA and non-esa) is $50,000 or greater at the time of fee billing. The fee is also waived for all ESAs of an Authorized Person if the aggregate balance of the Authorized Person s household assets in T. Rowe Price mutual fund accounts is $100,000 or greater at the time of fee billing. These thresholds and fee amounts are subject to change. 14

20 If a T. Rowe Price ESA is closed during the year, the annual fee will be deducted automatically from the proceeds of the distribution from each mutual fund unless, at the time of redemption, the fee was previously paid for that year. This fee applies regardless of the value of the fund investments. Some of these fees may be deductible for federal income tax purposes if a taxpayer itemizes deductions. Consultation with a tax adviser on this matter is recommended. COORDINATION WITH OTHER EDUCATION INCENTIVES Qualified Tuition Programs (529 Plans) A contribution to an ESA may be made in the same year that a contribution is made for the same Beneficiary to a qualified tuition program. If a Beneficiary receives distributions from both an ESA and a qualified tuition program in the same year, and the total distributions exceed Qualified Education Expenses, those expenses must be allocated between the ESA distribution and qualified tuition program distribution before figuring how much of each distribution is taxable. Hope and Lifetime Learning Credits A Hope or Lifetime Learning credit can be claimed in the same year the Beneficiary takes a tax-free distribution from an ESA, provided the same expenses are not used for both benefits. This means the Beneficiary must reduce Qualified Education Expenses by tax-free educational assistance and then further reduce them by any expenses taken into account in determining a Hope or Lifetime Learning credit. Financial Aid An investment in an ESA could affect a Beneficiary s eligibility to receive aid through public or private scholarship or loan programs. For purposes of financial aid, the U.S. Department of Education generally classifies an ESA as an asset of the parent (assuming the parent is the Authorized Person). Parental assets are typically treated more favorably than student assets when a student applies for aid. Additionally, the current position of the U.S. Department of Education is that any ESA distributions used for Qualified Education Expenses should not be counted later as student income. However, the treatment of ESA assets for financial aid can vary from one educational institution to another. T. Rowe Price cannot offer any advice regarding the impact of an ESA on eligibility for financial aid. The Authorized Person and/or Beneficiary should check with any schools the Beneficiary is considering. It may also be helpful to consult a tax or college adviser to check applicable laws or regulations in this area. MISCELLANEOUS Investment Performance Not Guaranteed The growth of a T. Rowe Price ESA can be neither projected nor guaranteed. There is no guarantee that the mutual fund investment selected will meet its objectives. The funds past performance cannot guarantee future results. The mutual fund shares are not deposits or obligations of, or guaranteed or insured by, any depository institution, the FDIC, the Federal Reserve, or T. Rowe Price. Any risk of loss in the value of an ESA or other benefit rests exclusively with the Authorized Person and Beneficiary. Account Termination The Authorized Person may terminate an account at any time upon written notice to T. Rowe Price. Termination shall be effected by distributing all assets in a lump sum to the Beneficiary unless other arrangements have been made, such as a rollover to a new Beneficiary. Income 15