Education IRA

Definition

An Education IRA is a custodial account created for the purpose of paying for the qualified higher education expenses of a designated beneficiary. In 2001, all existing Education IRA accounts were renamed to Coverdell Education Savings Accounts (ESA), or Coverdell ESA.

Explanation

The Coverdell Education Savings account allows parents and students to save for expenses associated with an education.  Contributions to an ESA are made on an after-tax basis.  Growth of the account is tax-free until withdrawn.

If the account beneficiary uses the account's funds to pay for qualified education expenses at an eligible institution, then the distribution will also be tax free.  Expenses include tuition, fees, books, supplies, and some costs associated with room and board.

Eligible institutions include virtually all accredited colleges, universities, vocational schools and other postsecondary educational institutions participating in the Department of Education's student aid program.

Total contributions per beneficiary cannot exceed $2,000 in a calendar year.   Income limits may also apply to those funding this account.

For the most recent rules under this program, see our article on Coverdell ESAs.

Related Terms

Coverdell IRA, 529 plans, student loans