New Name, Better Benefits for Education

Americans, in general, are not savers. Not even when the reason for saving is a good one: education. Uncle Sam has decided to try to encourage saving for education by renaming and revamping the education IRA.

The new program is called a Coverdell Education Savings Account or ESA. It was created as an incentive to help students and their parents save for education expenses.

Like the education IRA, an ESA is set up for a beneficiary under the age of 18. Any individual, including the beneficiary, can contribute to the ESA providing their modified adjusted gross income (MAGI) is less than $110,000 ($220,000 for those filing joint tax returns). Total annual contributions to an ESA cannot exceed $2,000, regardless of the number of ESAs created or the number of contributors. Contributions can be made up until the tax-filing deadline, April 15.

The beneficiary of the ESA will not owe tax on any distributions as long as the total distributions do not exceed the qualified education expenses at an eligible educational institution. Distributions can be applied to elementary and secondary education expenses as well as higher, post secondary, education. Eligible institutions include any public, private or religious school as determined by state law.

Balances remaining in an ESA when the beneficiary reaches the age of 30 must be distributed within 30 days. A portion representing the earnings on the account will be taxable and subject to an additional 10 percent tax. These taxes may be avoided by rolling the remaining balance into another ESA for another family member.


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