Explore Coverdell Accounts

Learn how to invest in your child's education.


Coverdell Education Savings Accounts (ESAs)

Formerly known as Education IRAs, Coverdell ESAs are a type of investment account that allows you to save for a child's education. Like 529s, Coverdell ESAs offer tax-deferred growth and the ability to withdraw money tax-free as long as it is used for qualified educational expenses.

A Coverdell can be set up with a bank, mutual fund company, or stockbroker for children under 18 years of age or persons who qualify as a special needs beneficiary. A maximum of $2,000 can be deposited into the account each year.

More than one person can contribute to the account, but the total contribution still cannot exceed $2,000. Unlike 529s, contributions to a Coverdell aren't tax deductible. But the annual percentage-of-assets charges for Coverdell accounts are typically lower than for 529 plans.

Advantages

  • Coverdells are flexible accounts. In addition to using a Coverdell to pay for college expenses, you can also apply it to the cost of public and private elementary and secondary schools.
  • Anyone can contribute to a Coverdell - you don't need to be a parent, or even related to the beneficiary at all.
  • The invested money grows tax-free, and you don't have to pay tax as long as you use withdrawals from the account to fund qualified educational expenses.
  • Coverdells are treated as parental assets in college financial-aid formulas and will not affect the amount of financial aid you are awarded.

Disadvantages

  • No more than a total of $2,000 can be deposited annually into a Coverdell.
  • If the money in a Coverdell is not used for education expenses by the time the beneficiary is 30 years of age, unless he or she is a special needs beneficiary, the proceeds are paid out to him or her and are subject to taxes and a 10% penalty on the earnings.
  • Top-tier earners (married couples that make more than $190,000 a year or a single person that earns more than $95,000 per year) can't contribute the full amount to a Coverdell. However, there are loopholes to this restriction. You can give your child $2,000 and he or she can contribute to the account, or the child's grandparents can contribute if their annual income is below the threshold.
  • Coverdell contributions aren't tax deductible.

More Information

For more information on Coverdell accounts, contact the Texas Financial Aid Information Center (TFAIC) at (888) 311-8881. Or visit the following websites:


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