What Is an Education Savings Account (ESA)?

The Internal Revenue Service provides various tax incentives for college financial planning. One of the most popular IRS
tax incentives for college financial planning is the Coverdell Education Saving Account or ESA for short. An ESA is an account created to help parents save for future educational expenses. As in everything created by the IRS, there are extensive rules governing the proper use of Coverdell Education Saving Accounts.

Let’s take a closer look at several Education Savings Account rules.

The main thing to remember with ESA rules is that substantial tax penalties exist for not following them closely.

Therefore, it’s critical to fully understand the ESA rules to prevent being penalized by the Internal Revenue Service.

The IRS mandates that the total amount per beneficiary of the ESA not exceed $2,000 per year. Remember, this is per beneficiary not per account, so if you are thinking to set up several accounts to “get around” this regulation, it’s not going to work!

Distributions from the account are tax free as long as they are used for qualified education expenses. These expenses include such things as books, computers, room, board, tuition and fees.

If there are any funds used for expenses over and above qualified educational expenses, they are taxed to the beneficiary with a penalty of normally 10%.

It’s important to check with your financial advisor before starting an Education Savings Plan. ESA’s are a great idea, as long as you follow the Education Savings Account rules.

Source: http://www.irs.gov/newsroom/article/0,,id=107636,00.html