Coverdell Education Savings Accounts (ESAs)

A Coverdell education savings account (ESA) is best defined as an investment account set up for paying the qualified educational expenses of the beneficiary of the account. The contributions to the ESA to fund it are not tax-deductible in any circumstances. So what makes the ESA better than other investments for education? The ESA's best features are tax related and two-fold: the earnings from the account are not currently taxed and withdrawals from ESAs are tax-free when used to pay for qualified educational expenses.

You may be more familiar with ESAs as education IRAs. The savings account name is a much better fit for these savings accounts because the term education IRA easily lends itself to misinterpretation. Mainly, that's because, although they were called retirement accounts, these types of investment vehicles are not retirement accounts at all. Therefore, while most people are familiar with individual retirement accounts (IRAs) when it comes to their retirement planning, they had misconceptions about education IRAs.

OK, you're thinking, now let's get to the fine print. Anytime the words "tax-free" appear I know all sorts of conditions have to be met. You are right, but not to worry, we will guide you through the particulars.

• Qualified Educational Expenses: The types of expenses for which ESA distributions can be used.
• ESA Beneficiaries: An explanation of who is eligible to benefit from a ESA.
• ESA Contributions: The who, what and when of contributions to ESAs.
• Pros and Cons of ESAs: A discussion of the advantages and disadvantages of ESAs.

© 2024 Wolters Kluwer. All Rights Reserved.