Education Savings Account
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An Education Savings Account (also known as a Coverdell Education Savings account, ESA, Coverdell account), 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 (#redirect [[Template:UnitedStatesCode]]).
The tax treatment of ESAs are much the same as 529 plans with a few important differences. Like a 529 plan, ESAs allow money to grow tax deferred and proceeds to be withdrawn tax free for qualified education expenses at a qualified institution.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). Education Savings Accounts were first cited in an article in [Reason Magazine], "Factory-like schooling may soon be a thing of the past," by Britton Manasco. The article credits Sharlene Holt, former Executive Director of ESANet (Educational Savings Accounts Network) for the concept.
Important differences with 529 plans
- 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)
- 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 an ESA must be disbursed on qualified education expenses by the time the beneficiary is 30 years old in order to avoid taxes and penalties; there is no age limit for 529 plans.
- As mentioned, 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 with 529 plans
- Generally, money in both an ESA and a 529 plan would be considered the child's (beneficiary's) money when applying for federal financial aid. This could reduce the amount of aid that would otherwise be awarded.
- 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 old beneficiary.
See also
External links
- http://www.irs.gov/publications/p970/ch07.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]
- [Reason Magazine], "Factory-like schooling may soon be a thing of the past," by Britton Manasco]
- http://www.schoolandstate.org/home.htm
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