ESA INVESTMENTS

A Coverdell Education Savings Account (ESA) is a tax-deferred trust account to assist families in saving for educational expenses for beneficiaries 18 years old or younger. The total maximum contribution per year for any single beneficiary is $2,000.

An ESA allows families to increase investment earnings through tax-deferral as long as the funds are used for educational purposes.

For example, if a family contributed $500 to an ESA and it appreciates to $5,000 in 10 years, the earnings would not be taxed until the account’s beneficiary was enrolled in a post-secondary institution. When the contributions are distributed, they are tax-free assuming that they are less than the account beneficiary’s annual adjusted qualified education expenses.

If the distributions are higher than the expenses, the gains are taxed at the account beneficiary’s rate, rather than the contributor’s rate, which is typically higher.