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Education Savings Account (ESA)
Savings plan for education expenses authorized by the Economic Growth and Tax Relief Act of 2001, which greatly expanded both contributions and income eligibility. Annual contribution limits in these accounts (formerly Education IRAs) were raised from $500 to $2,000 per year per child from birth to age eighteen, and the adjusted gross income limitation was increased to $95,000 for singles and $190,000 for married couples. The 2001 legislation renamed the tax-favored savings plan (created by the 1997 tax law) the Coverdell Education Savings Account, in recognition of its primary backer, the late Senator Paul Coverdell of Georgia.
Coverdell Education Savings Account earnings and withdrawals are tax-free, although annual contributions cannot be deducted from personal income taxes. Contributions can be made at any time up to the April 15 filing deadline for the applicable tax year (instead of December 31 under the previous law). Distributions may be used for a much wider range of education expenses, including books; elementary, secondary, and postsecondary school tuition and fees; personal computers; room and board; tutoring; and extended day-care expenses. Taxpayers taking a distribution from an education savings account may also claim a so-called hope credit for postsecondary education expenses or a lifetime learning credit to improve job skills for the same year they took a Coverdell ESA distribution as long as the ESA distribution is not used for the same expenses. Contributions to a Coverdell savings account and a qualified state tuition 529 plan in the same year are allowed without penalty.
Education Savings Account
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Education Savings Account
Investopedia Financial Dictionary:
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Coverdell Education Savings Account - ESA
A tax-deferred trust account created by the U.S. government to assist families in funding educational expenses for beneficiaries 18 years old or younger. While more than one ESA can be set up for a single beneficiary, the total maximum contribution per year for any single beneficiary is $2,000.
Investopedia Says:
Formerly called an education IRA, the ESA allows families to increase investment earnings through tax-deferral as long as the funds are used for educational purposes.
For example, if you contributed $500 to an ESA and it appreciated to $5,000 in 10 years, the earnings would not be taxed until the account's owner was enrolled in a post-secondary institution. When the contributions are distributed, they are tax-free assuming that they are less than the account holder's annual adjusted qualified education expenses.
In the event that the distributions are higher than the expenses, the gains are taxed at the account holders' rate, rather than the contributor's rate, which is typically higher.
Related Links:
This comprehensive guide goes through what an Education Savings Plan is and how to set one up, contribute to it and withdraw from it.
Education Savings Account Tutorial
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Helping your grandchildren save for college is a way to spoil them and reap some benefits yourself. Spoil Your Grandkids, Cut Your Tax Bill
Put your kids through school without being hounded by the tax man. Clearing Up Tax Confusion For College Savings Accounts
Before you fund one of these education-savings vehicles, be sure you know their differences. Choosing The Right 529 Education Savings Plan
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Barron's Banking Dictionary
Dictionary of Banking Terms. Copyright © 2006 by Barron's Educational Series, Inc. All rights reserved.
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Mentioned in
Education Ira
(finance term)
Qualified Tuition Program (529 Plan)
(finance term)
Individual Retirement Arrangement (or Account) (Ira)
(finance term)
College Financing
(How to save and pay for higher education)
» More