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Definition / Meaning of

Education Savings Account (ESA)

Categories: Finance,

You can put up to $2,000 a year into a coverdell education savings account (ESA) that you establish in the name of a minor child. The assets in the account can be invested any way you choose.There is no limit on the number of accounts you can set up for different beneficiaries, but no more than a total of $2,000 can be contributed in a single beneficiary's name in any one year. If you choose, you may switch the beneficiary of an ESA to another member of the same extended family.Your contribution is not tax deductible. But any earnings that accumulate in the account can be withdrawn tax free if they're used to pay qualified educational expenses for the beneficiary until he or she reaches age 30. The costs can be incurred at any level, from elementary school through a graduate degree, or at a qualified post-secondary technical or vocational school. There are no restrictions on using ESA money in the same year the student uses other tax-free savings, or the student, parent, or guardian uses tax credits for educational expenses. But you can't take a credit for expenses you covered with tax-free withdrawals.To qualify to make a full $2,000 contribution to an ESA, your modified adjusted gross income (MAGI) must be $95,000 or less, and your right to make any contribution at all is phased out if your MAGI is $110,000 if you're a single taxpayer. The comparable range if you're married and file a joint return is $190,000, phased out at $220,000.