DEFINITION of 'Coverdell Education Savings Account - ESA'

A tax-deferred trust account created by the U.S. government to assist families in funding educational expenses for beneficiaries 18 years old 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.

BREAKING DOWN 'Coverdell Education Savings Account - ESA'

Formerly called an education IRA, the ESA allows families to increase investment earnings through tax-deferral as 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
  1. Education IRA

    A savings plan for higher education. Parents and guardians are ...
  2. Form 1099-Q

    An IRS form that an individual who receives distributions from ...
  3. Beneficiary

    Anybody who gains an advantage and/or profits from something. ...
  4. Primary Beneficiary

    A beneficiary in a will, trust or insurance policy that is first ...
  5. Named Beneficiary

    This term refers to any beneficiary named in a will, a trust, ...
  6. Absolute Beneficiary

    A designation of a beneficiary that can not be changed without ...
Related Articles
  1. Financial Advisor

    Why Coverdell ESAs May Trump 529 Plans

    Coverdell ESAs still trail 529 plans in popularity by a wide margin due to their low contribution limits. But these accounts can be a viable alternative.
  2. Personal Finance

    529 Plan or Coverdell? How to Choose College Savings Plans

    There are two options when it comes to tax-free college savings plans: a 529 plan or a Coverdell ESA. Here's how they compare.
  3. Personal Finance

    Advising FAs: Explaining College Savings Accounts to Clients

    There are several types of savings accounts designed for higher education available today. The right one for you will depend upon factors such as your tax bracket, time horizon, investment objectives ...
  4. Financial Advisor

    Why You Need to Find the Right IRA Beneficiary

    It definitely matters who you pick as your IRA beneficiary—and how you go about it. And in some cases, your best option may be to go with a trust.
  5. Retirement

    3 Deadlines For Retirement Plan Beneficiaries

    To take full advantage of new RMD regulations, beneficiaries need to take action before important deadlines.
  6. Financial Advisor

    How to Handle Client Beneficiary Designations

    Beneficiary designations are a critical financial planning step that can be easily overlooked. Here's how to ensure they are properly done.
  7. Retirement

    What You Should Know About IRA Beneficiaries: Part 2

    Here's how IRAs, and the beneficiaries you name, work with wills and trusts.
  8. Personal Finance

    529 Plan Contribution Limits in 2016

    Learn about the contribution and account balance limits on 529 plan accounts and discover how these contribution limits differ in each state.
  9. Retirement

    Who is a Beneficiary?

    A beneficiary is a person or entity that receives funds, assets, property or other benefits from a trust, will, or life insurance policy.
  10. Retirement

    Breaking Down IRA Beneficiaries: Part 1

    It's important to give serious consideration to your IRA beneficiary designations.
RELATED FAQS
  1. What is the best way to save for private school expenses? A 529 plan, a Coverdell ...

    If the goal is to put the money in the plan towards private school expenses, then the Coverdell Education Savings Account ... Read Answer >>
  2. What are the risks involved in a banker's acceptance?

    Learn about the different kinds of college savings accounts, how they can benefit a college saver and how to open these savings ... Read Answer >>
  3. What are the pros/cons of naming a trust as the beneficiary of a retirement account?

    This has been the topic of an ongoing debate in the financial community between estate planning attorneys and financial advisors. ... Read Answer >>
  4. What are the keys to setting up a trust fund?

    Setting up a trust to secure your assets for a beneficiary allows you to set the terms under which the beneficiaries are ... Read Answer >>
  5. Can mutual funds have beneficiaries?

    Learn about the different types of mutual fund ownership and the various ways beneficiaries can be established. One common ... Read Answer >>
Trading Center