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What is a Coverdell Education Savings Account (ESA)?

A Coverdell Education Savings Account is a tax-advantaged trust account for savings to cover educational expenses for beneficiaries. The beneficiaries of the savings account must not be over 18 years, except for some exceptional cases, such as individuals with special needs or disabilities. A Coverdell Education Savings Account is otherwise called a Coverdell ESA, a Coverdell account or an ESA.

How Does a Coverdell Education Savings Account Work?

Section 530 of the Internal Revenue Code established a Coverdell ESA. funds or savings kept in this account can be used to settle tuition, purchase of books, uniforms or clothing and other related educational expenses for beneficiaries. As a tax-deferred trust account, a Coverdell ESA is regulated by the Internal Revenue Service. Aside from the age restrictions on this account, there are other restrictions. A Coverdell account was formerly called an education Individual retirement account (IRA), is a tax-deferred account, the account holdings can appreciate depending on the number of years they are kept in the account. The IRS permits opening multiple accounts for a single beneficiary, however, the maximum amount allowable for an account is $2,000.

Understanding Coverdell Education Savings Accounts

A Coverdell Education Savings Accounts can be opened for individuals who are 18 years or below by brokerage firms of financial institutions. A Coverdell ESA is tax-deferred is different form other savings accounts that individuals below 18 years can open. One of the advantages of an ESA is that multiple accounts can be opened for the same beneficiary but the limit of each account is a contribution of $2,000 for a year. When compared to a 529 college savings plan, there are differences, given that a 529 account allows for as many contributions as possible without any limit. In the United States, an individual who is 18 years or below is permitted to have both a Coverdell ESA and a 529 plan. While certain fees are paid on a 529 plan, an ESA is tax-deferred.

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