Coverdell Education Savings Accounts
What Is a Coverdell Education Savings Account (ESA)?
The Coverdell Education Savings Account (ESA) is a federally sponsored savings account
that allows you to set aside up to $2,000 per year towards college costs. Your savings
will grow tax-free, and withdrawals are tax-free if spent on the education costs
of qualified schools. The U.S. Department of Education defines which colleges and
vocational schools qualify. And, unlike other ESAs, many public, private, and religious
schools that provide elementary or secondary education are considered qualified
schools for Coverdell ESA withdrawals. Keep this great benefit in mind if you are
planning on sending your child to a private elementary or secondary school.
A Coverdell ESA is generally set up by an account owner, who specifies a beneficiary
whose education will be funded by the savings. There are no guidelines for the relationship
between the account owner and the beneficiary. To start a Coverdell ESA, inquire
with a bank or other trusted financial institution.
Contribution Guidelines for a Coverdell ESA
Here are some guidelines for contributions made to a Coverdell ESA:
- The contribution limit is $2,000 a year per beneficiary. If multiple contributors
deposit funds for the same beneficiary, the sum of all the contributions may not
exceed $2,000.
- To contribute the maximum of $2,000 a year, contributors must earn less than $95,000
if filing singly or less than $190,000 if filing jointly. The maximum contribution
is lowered gradually for contributors who earn as much as $110,000 if filing singly
or $220,000 if filing jointly.
- Contributions may be made until the beneficiary's 18th birthday.
- Contributions made before April 15th of any year may be counted as a contribution
for the previous year.
- Contributions are not deductible on your federal income tax.
- Contributions qualify as part of the annual $13,000 gift tax exclusion.
- The plan may be rolled over to another financial institution once in a 12-month
period. There are no taxes or penalties if the funds are deposited in a new plan
within 60 days.
Distribution Guidelines for a Coverdell ESA
Distributions, or withdrawals, are subject to the following guidelines:
- Withdrawals must be made for qualified education expenses. Qualified expenses
include tuition, books, fees, supplies, equipment, and some room and board expenses.
Withdrawals may also be spent on certain elementary and secondary education expenses.
If you are considering sending your child to a private elementary or secondary school,
this could be a great savings plan for you.
- Beneficiaries must be enrolled at least half-time at a college that participates
in student aid programs.
- Withdrawals spent on non-qualified expenses are subject to tax on the earnings
and a 10% penalty.
- All the funds must be withdrawn within 30 days of the beneficiary's 30th birthday,
or they are subject to tax on the earnings and a 10% penalty.
Impact of a Coverdell ESA on Financial Aid Eligibility
- A parent owned Coverdell ESA is reported as a parent asset on the
federal student aid application (FAFSA).
It is assessed at 5.64% when the federal Department of Education calculates your
expected family contribution (EFC).
- A Coverdell ESA owned by a dependent student is not reported on the FAFSA. A Coverdell
ESA owned by an independent student is reported as a student asset on the FAFSA.
It is assessed at 20% when the federal Department of Education calculates your EFC.
- A Coverdell ESA owned by a grandparent is not included on the FAFSA when calculating
financial aid for the student.
- Qualified withdrawals are not counted as income on the next year's FAFSA application.
- You may use a
American Opportunity Tax Credit
or
Lifetime Learning Tax Credit
in the same year that you spend your Coverdell ESA money.