Issues Library—Tax Policy
Education Savings Accounts
What are Education Savings Accounts (ESAs)?
These accounts allow parents to save for a child’s elementary, secondary, or college education without being taxed on interest income. The concept is similar to that of the increasingly popular “Roth” IRA. The government creates a tax incentive for parents to save for their children’s K–12 education. As with the Roth IRA, parents pay taxes up front on the starting deposit, but any interest or capital that accumulates is tax-free.
Two commonly used ESAs are: 1) the Coverdell ESA, which can be used for education expenses from preschool-college, and 2) a Qualified Tuition Program (QTP), also known as a “529” plan, the funds of which can only be used for higher education expenses at an eligible educational institution.
Who Can Establish an ESA?
Public school, private school, and homeschool families alike can use Coverdell ESAs and QTPs to save for college expenses. However, current federal law only allows Coverdell Education Savings Account funds to be used for K–12 public and private schools. Consequently, Coverdell funds can only be used for homeschooling expenses where state law either considers homeschools to be private schools or provides an option for homeschools to register as private schools. To find out what type of law your state has, see HSLDA's State Laws page.
What Should Homeschoolers do?
HSLDA supports legislation modifying federal law to allow homeschoolers in all states to use Coverdell funds for educational expenses. While HSLDA has lobbied for such legislation in the past, it has yet to pass.
Read more: “Coverdell Education Savings Accounts—background”
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