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An, Education Savings Account also known as a Coverdell Education Savings account, an ESA, or a Coverdell account, is a tax advantaged investment account in the United States designed to encourage savings to cover future college education expenses.
The tax treatment of ESA's are much the same as 529 plans with a few important differences. Like a 529 plan an ESA's allow money to grow tax deferred and proceeds to be withdrawn tax free for qualified education expenses at a qualified institution.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.
1 Important differences with 529 plans
- ESA's have lower contribution limits; currently $2,000 can be contributed per year per child.
- ESA's can allow almost any investment inside including stock's, bond's, and mutual funds, while 529 plans only allow a choice among a number of state run allocation programs. The rules for investments allowed in ESA's are the same as those for IRA's.
- Balances in an ESA must be disbursed by the time the beneficiary is 30 years old. Either spending the money or rolling it over to another eligible beneficiary would qualify. (Gift tax rules apply)
- Current thinking is that money in an ESA would be considered the child (beneficiary)'s money when applying for federal financial aid. This could reduce the amount of aid that would otherwise be awarded.
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