Coverdell Education Savings Account

With the rising cost of education, it's easy to feel overwhelmed when saving for your child's education. If you're looking for an account to help you get started, the Coverdell Education Savings Account, or Coverdell ESA, is an option you should consider. A Coverdell ESA is a custodial account (an account set up and managed by an adult for a minor) designed to help save and pay for qualifying education expenses. This article explains more about how a Coverdell ESA works and what it takes to start this type of account.

Education is one of the most significant expenses a parent faces throughout their child's lifetime. Establishing a Coverdell ESA can help ease that burden. In its simplest definition, a Coverdell ESA is a tax-advantaged investment account designed to encourage saving to help cover education-related expenses. The beneficiary of the account can receive tax-free distributions to cover qualified education expenses as long as the distributions are equal to or less than the qualified educational expenses for the tax year.¹ In addition to covering higher education costs, you can also use a Coverdell ESA towards eligible K-12 education expenses.

Eligibility requirements to open a Coverdell ESA are very specific. The designated beneficiary must be under 18 years old during the contribution year. The only exception to this rule is if the beneficiary has special needs. The account must be designated as a Coverdell ESA during account opening, and the document creating and governing the account must be in writing.

The maximum contribution for a Coverdell ESA is $2,000 per taxable year, regardless of the contributor. It's important to note that the maximum contribution is per beneficiary, not per account. The $2,000 maximum depends on your tax filing status and modified adjusted gross income.¹ Contributions can be made by the parents, grandparents, other family members, friends, and even the designated beneficiary as long as they meet those income thresholds.

Once the beneficiary turns 18, contributions are only allowed if the beneficiary has special needs, and the funds must be used before the beneficiary turns 30. If the beneficiary dies, any remaining funds must be distributed within 30 days of their death. Should the beneficiary choose not to attend college, certain transfers to family members of the beneficiary are allowed without tax consequence.¹ You can also change the beneficiary to another family member once per year. 

As a federally sponsored custodial account, a Coverdell ESA can be set up on behalf of a designated beneficiary to use on qualified education expenses once they turn 18. The qualified expenses must correlate to the enrollment or attendance of the designated beneficiary at an eligible education institution. Coverdell ESA contributions are not tax deductible; however, distributions are tax-free if used for qualified education expenses.

Distributions for qualified expenses will vary depending on the school level. Primary, secondary, and higher education expenses will likely include but are not limited to:

• Tuition and fees
• Books
• Academic tutoring
• Computer equipment and related items
• Special needs services (Special Needs Beneficiary)
• Room and Board
• Uniforms
• Transportation

A Coverdell ESA is a valuable tool for parents looking to save for their child's education expenses, offering a practical way to alleviate the financial burden of education with its tax advantages and specific requirements. Enjoy contributions of up to $2,000 annually and tax-free distributions for qualified expenses.¹ If you're overwhelmed by education costs, consider opening a Coverdell ESA with us and start saving for your child's future today.

¹Consult your tax advisor for any tax deductions, benefits, or other potential tax benefits regarding this account.