Coverdell Education Savings Account (ESA)
A type of tax-deferred trust account created by the U.S. government to assist families in funding educational expenses for beneficiaries 18 years 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 so 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 Terms:
529 Plan
Baccalaureate Bond
Education IRA
Form 1099-Q
Full-Time Student
Income Tax
Individual Retirement Account - IRA
Qualified Higher Education Expense
Student Loan Interest Deduction |