User:BenjaminKahn/Coverdell education savings account

Structure
Coverdell ESA's have two primary parties: a trust or custodian, who manages the account, and a beneficiary, who receives distributions from the account. The trust or custodian is the party that establishes and controls the funds in the ESA for the student beneficiary, who must be under the age of 18 at the time of designation. Funds within the account are not considered to be owned by the custodian nor the beneficiary unless they are the same individual. All funds within an ESA must be distributed to the beneficiary before he or she turns 30 years old, but the custodian may name a new beneficiary of the account before such time in order the preserve the account.

Coverdell ESA's are self-directed investment accounts. Unlike bank deposit accounts, such as checking or savings accounts which are pure cash holdings and are typically insured, ESA's can contain both cash and investment securities such as stocks, bonds, real estate funds, and mutual funds. The value of these securities is not insured. This means the value of the funds in an ESA may rise and fall with the respective values of the securities held in the account. Coverdell ESA's may be opened with any investment brokerage institution who select a wide range of securities for the custodian to choose. The investment options for an ESA are therefore only limited by the choices available at that institution.

Tax-Advantaged Status
The funds contained in Coverdell ESA's are classified as tax-defered. This means the appreciation, interest, and profits of securities within the account are not taxed as capital gains or income. Qualified distributions from an ESA are tax-free and are not considered income to the beneficiary, nor are contributions to ESA's tax-deductible. However, if the beneficiary receives an ESA distribution that exceeds his or her total qualified expenses in a given year, the excess is taxed as normal income. Any excess distribution that results from distributing the remainder of the account once the beneficiary turns 30 years old is also taxed as normal income.

Contributions
There are no restrictions on who can make qualified contributions to a Coverdell ESA, but there are limits on how much. Each ESA plan can only receive a total of $2,000 in contributions per tax year. Individuals may contribute to any number of accounts per tax year as long as each plan does not exceed the $2,000 contribution limit. Contributors with a higher modified adjusted gross income, or MAGI, of $95,000+ for single tax filers or $195,000+ for joint filers may not contribute the full $2,000 limit. Single tax filers exceeding a MAGI of $110,000 or joint filers exceeding $220,000 may not contribute to Coverdell ESAs at all.

Distributions
The beneficiary may request, or the custodian may elect, to use Coverdell ESA funds to pay for qualified educational expenses. Qualified expenses include, but are not limited to, tuition and fees, books and supplies, room and board, and some special needs services if required by the student. Qualifying educational institutions include all accredited primary and secondary schools, including private or religious institutions, and post-secondary institutions that are eligible to receive federal financial aide. There are no restrictions on the amount of qualified funds that may be distributed within a given year and distributions are purely voluntary.

Comparison to a 529 Plan
Coverdell ESAs have many similarities and differences to a 529 Plan, another tax-advantaged investment account aimed at helping students pay for their education. ESA's and 529s are the only two types of tax-advantaged educational accounts currently allowed by the U.S. tax code.

Effects
Since Coverdell ESAs are tax-advantaged, they impact federal tax revenues. The annual revenue lost to the IRS is small at about $100 million per year, or roughly less than 10 times less than the revenue loss generated by 529 plans. ESA's also reduce federal government expenditures since savings assets such as Coverdell accounts typically lower the amount of financial aide a student is eligible to receive. The impact of this reduction of federal student aid impacts students and their families differently. Students belonging to higher-income households face a smaller relative impact than those coming from lower-income households, thus increasing the disparity in financial aide as a result of income.