Coverdell Education Savings Account
Encyclopedia
A Coverdell Education Savings Account (also known as an Education Savings Account, a Coverdell ESA, a Coverdell Account, or just an ESA and formerly known as an Education Individual Retirement Account
), is a tax-advantaged
investment account in the United States
designed to encourage savings to cover future education expenses (elementary, secondary or college), such as tuition, books, uniform, etc. It is found at section 530 of the Internal Revenue Code
.
The tax treatment of Coverdell ESAs is much the same as that of 529 plan
s with a few important differences. Like a 529 plan, Coverdell ESAs allow money to grow tax deferred and proceeds to be withdrawn tax free for qualified education expenses at a qualified institution. However the definition of qualified expenses in an ESA includes primary and secondary school, not just college and university.
The account is named for its primary champion in the U.S. Senate, the late Senator Paul Coverdell
(R-GA).
Individual Retirement Account
An individual retirement arrangement is the blanket term for a form of retirement plan that provides tax advantages for retirement savings in the United States...
), is a tax-advantaged
Tax advantage
Tax advantage refers to the economic bonus which applies to certain accounts or investments that are, by statute, tax-reduced, tax-deferred, or tax-free...
investment account in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
designed to encourage savings to cover future education expenses (elementary, secondary or college), such as tuition, books, uniform, etc. It is found at section 530 of the Internal Revenue Code
Internal Revenue Code
The Internal Revenue Code is the domestic portion of Federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code...
.
The tax treatment of Coverdell ESAs is much the same as that of 529 plan
529 plan
A 529 plan is a tax-advantaged investment vehicle in the United States designed to encourage saving for the future higher education expenses of a designated beneficiary.- Overview :529 plans are named after section 529 of the Internal Revenue Code...
s with a few important differences. Like a 529 plan, Coverdell ESAs allow money to grow tax deferred and proceeds to be withdrawn tax free for qualified education expenses at a qualified institution. However the definition of qualified expenses in an ESA includes primary and secondary school, not just college and university.
The account is named for its primary champion in the U.S. Senate, the late Senator Paul Coverdell
Paul Coverdell
Paul Douglas Coverdell was a United States Senator from Georgia, elected for the first time in 1992 and re-elected in 1998, and director of the Peace Corps from 1989 until 1991...
(R-GA).
Important differences with 529 plans
- Coverdell ESAs have lower maximum contribution limits; currently $2,000 can be contributed per year per child, while 529 plans generally have no restrictions on contributions, up to the maximum lifetime contribution.
- Coverdell ESAs can allow almost any investment inside including stocks, bonds, and mutual funds, while 529 plans only allow a choice among a number of state run allocation programs. The rules for investments allowed in ESAs are the same as those for IRAIndividual Retirement AccountAn individual retirement arrangement is the blanket term for a form of retirement plan that provides tax advantages for retirement savings in the United States...
s.
- Balances in a Coverdell ESA must be disbursed on qualified education expenses by the time the beneficiary is 30 years old or given to another family member below the age of 30 in order to avoid taxes and penalties; there is no age limit for 529 plans.
- Coverdell ESAs allow withdrawing the money tax free for qualified elementary and secondary school expenses; 529 plans do not.
- The income level of a donor may affect contributions into a Coverdell ESA, but would not affect contributions to a Section 529 plan.
Important similarities to 529 plans
- Money in both a Coverdell ESA and a 529 plan is not considered the child's (beneficiary's) money when applying for federal financial aid as long as the owner of the account is someone other than the beneficiary, such as a parent. This works to increase the child's potential financial aid because parents are expected to contribute only around 6% of their assets to finance college education, as opposed to the child's 35%.
- The custodian of both an ESA and a 529 plan can designate a new beneficiary without incurring taxes or penalties provided that the new beneficiary is an eligible family member of the previous beneficiary.
External links
- http://www.irs.gov/publications/p970/ch08.html — also available as a pdf from the IRS website as part of publication 970
- Congressional Research Service (CRS) Reports regarding Education Savings Accounts
- U.S. Code regarding Education Savings Accounts