Coverdell Education Savings Account

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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 IRA), is a tax-advantaged investment account in the United States designed to encourage savings to cover future college education expenses. It is found at section 530 of the Internal Revenue Code (26 U.S.C. § 530).

The tax treatment of Coverdell ESAs are much the same as 529 plans 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 Like a 529 plan, Coverdell ESAs allow money to grow tax deferred and proceeds to be withdrawn tax free for qualified education expenses at a qualified institution.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).

1 Important differences with 529 plans
2 Important similarities with 529 plans
3 See also
4 External links

[edit] Important differences with 529 plans

Coverdell ESAs have lower contribution limits; currently $2,000 can be contributed per year per child, while 529 plans generally have no restrictions on contributions. (Gift tax rules apply)

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 IRAs.

Balances in a Coverdell ESA must be disbursed on qualified education expenses by the time the beneficiary is 30 years old or gifted 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.

[edit] Important similarities with 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.