A bill to amend the Internal Revenue Code of 1986 to provide for the establishment of educational savings accounts the earnings on which will not be taxed.

Amends the Internal Revenue Code to provide for the establishment of education savings accounts as tax-exempt entities (except with respect to the tax on unrelated business income of charitable organizations). Identifies the criteria applicable to such accounts, which must be established exclusively for the purpose of paying the educational expenses (tuition, supplies, meals, and lodging) of an individual at an institution of higher education or a vocational school.

Limits the amount of contributions to such an account to $1,000 per calendar year. Adjusts this limit annually for inflation. Provides that no account may have more than one beneficiary and that no individual may be a beneficiary of more than one account. Requires any balance in an education savings account to be distributed after the beneficiary attains age 25.

Permits the exclusion from the gross income of the taxpayer-contributor of payments and distributions from an education savings account as long as such amounts: (1) are used exclusively for the educational expenses of the eligible beneficiary; (2) are rolled over into another education savings account; or (3) are distributions of excess contributions before the due date of the tax return.

Provides that for the ten tax years beginning when the beneficiary attains age 25, ten percent of the amount paid or distributed from an education savings account to pay the educational expenses of that individual shall be included in his or her gross income each year.

Retains the tax-exempt status of the accounts themselves unless they cease to be proper education savings accounts because either the contributor-taxpayer engages in prohibited transactions or the account's beneficiary pledges the account as security.

Establishes penalties in the form of additional tax when account funds or distributions are used for other than educational purposes.

Requires that the trustee of an education savings account report to the Secretary of the Treasury and to the account's beneficiary on the maintenance of the account.

Establishes a six percent excise tax on excess contributions to an education savings account.

Provides that contributions to an education savings account shall not be subject to gift tax.

Establishes a five percent excise tax on amounts connected with any prohibited transaction with respect to an education savings account.

Establishes a penalty for failure to file required reports concerning the education savings account.

Excludes from the gross income of an individual any distributions from an education savings account used exclusively for that individual's educational expenses (deferring taxation of these amounts until the beneficiary attains age 25).