Coverdell Education Savings Account (ESA)

Introduction: Other than a 529 savings plan, the Coverdell education savings account, formerly known as an Education IRA, is the best, and most tax advantaged, vehicle for college funding. Parents, relatives, guardians or friends of a child can set up one or more Coverdell ESAs for a designated beneficiary, which covers a wide range of qualified educational expenses, including tuition and fees, books, supplies and equipment, room and board, academic tutoring, transportation costs, and special needs costs (if applicable).

Tax Benefits: The tax benefits available for a Coverdell ESA are similar to that of a Roth IRA, with contributions being taxed before being paid into the account, and all funds in the account, both contributions and earnings, being allowed to grow tax-free in the account until distribution, so long as the funds are used only for the designated beneficiary’s educational expenses.

Eligibility & Contribution Limits: You can setup a Coverdell ESA if your modified adjusted gross income (MAGI) is less than $110,000 ($220,000 for joint returns), regardless of your relationship with the designated beneficiary, or lack thereof. There is no limit to the number of accounts which can be setup for a single beneficiary, but the sum total of all annual contributions towards all accounts for a single beneficiary put together cannot exceed $2000. No contributions can be made to an account once the beneficiary becomes 18 years of age, except in the case of individuals with special needs. For updates and latest information, please visit the IRS, Publication 970, tax benefits for higher education.

Establishing an ESA: A Coverdell ESA can be setup either as an FDIC and DIF insured bank account, or as a Mutual Fund. Any bank, mutual fund company or financial institutions serving as custodians for traditional IRAs are capable of establishing an ESA for you. Enrollment forms can be availed of in person or electronically downloaded from the website of the individual bank or financial organization where you wish to setup the ESA.

Balance amounts remaining in the account after the beneficiary completes his or her education must be distributed before the beneficiary reaches age 30, and in this case, transfers to certain members of the family are permitted. You also have the option of opening, in addition to the Coverdell ESA, other tax-advantaged education savings accounts, such as a 529 plan, in order to increase the funds available for educational expenses.