Coverdell Education Savings Accounts (ESAs) were established to help parents, grandparents and other interested persons save money to help pay for the education expenses of a child. While similar in some ways to a 529 Plan, an ESA has its own unique features, one of which is greater flexibility in terms of how the money can be used. Anyone can establish a Coverdell for a child or beneficiary, and there can be multiple ESAs established for the same child as long as the $2,000 combined annual limit per child is maintained.
The Basics of an ESA:
- An ESA is tax-advantaged if the money is used to pay for higher education expenses.
- Custodians have flexibility in choosing the beneficiary.
- Money in an ESA is considered the beneficiary's money when applying for federal financial aid. (This could lower the amount of student aid available.)
Who is Eligible to Contribute to an ESA?
Anyone, whether related to the account beneficiary or not, may contribute toward the combined annual maximum of $2,000 in a child’s Coverdell ESA provided their earned income is within federally mandated limits. (Consult a tax professional for information.)
Distributions are not subject to federal income tax if they are rolled-over to another ESA for the benefit of the same beneficiary or a member of the beneficiary's family who is under the age of 30.
Contributions cannot be made into the account after the beneficiary reaches age 18. The balance of the account must be distributed within 30 days after the beneficiary reaches the age of 30. An exception to both of these rules applies if the beneficiary is a special needs student.
What are the Tax Benefits?
Contributions to a Coverdell ESA are not tax-deductible, but earnings are tax-deferred and distributions are tax-free if used to pay for the account beneficiary’s qualified expenses for costs incurred for kindergarten through 12th grade, college or trade school. If you are unsure if a particular educational institution qualifies, speak to someone in the financial aid office.
Your ESA will earn the same rate as the IRA Accumulation Account (though it is not an IRA). You can increase the earning potential by setting up an ESA Certificate (minimum balance $500.)
CertificatesEffective Nov 1, 2019
*APY=Annual Percentage Yield
Learn more about how to finance your child’s education.