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Encyclopedia > Coverdell Education Savings Account

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. ยง 530). An Individual Retirement Account (or IRA) is a retirement plan account that provides some tax advantages for retirement savings in the United States. ... 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. ... The Internal Revenue Code (or IRC) (more formally, the Internal Revenue Code of 1986, as amended) is the main body of domestic tax law of the United States organized topically, including laws covering the income tax (see Income tax in the United States), payroll taxes, and excise taxes. ... The Internal Revenue Code (or IRC) (more formally, the Internal Revenue Code of 1986, as amended) is the main body of domestic tax law of the United States organized topically, including laws covering the income tax (see Income tax in the United States), payroll taxes, and excise taxes. ...


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 Like a 529 plan, Coverdell ESAs allow money to grow tax deferred and proceeds to be withdrawn tax free for qualified education expenses at a qualified institution.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. A 529 plan is a tax-advantaged investment vehicle in the United States designed to encourage saving for a childs future higher education expenses. ...


The account is named for its primary champion in the U.S. Senate, the late Senator Paul Coverdell (R-GA). Paul Douglas Coverdell (January 20, 1939 – July 19, 2000) was a United States Senator from Georgia and was also the director of the Peace Corps from 1989 until 1991. ...

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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.

Inheritance tax, also known in some countries outside the United States as a death duty and referred to as an estate tax within the U.S, is a form of tax levied upon the bequest that a person may make in their will to a living person or organisation. ... An Individual Retirement Account (or IRA) is a retirement plan account that provides some tax advantages for retirement savings in the United States. ...

Important similarities with 529 plans

  • Generally, money in both a Coverdell 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 previous beneficiary.

See also

What follows is a list of over 250 Wikipedia articles on finance topics. ...

External links


 
 

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