KBID 425 Date Created: 4/3/2003 Date Modified: 8/22/2023
Terms of Use
Formerly called Education IRAs, a Coverdell Education Savings Account (ESA) is a type of IRA that allows you to make nondeductible contributions up to $2,000 annually for anyone under the age of 18 or a special needs beneficiary of any age. Assets in a Coverdell ESA must be used for qualified education expenses before your child (the designated beneficiary) turns 30 in order to be withdrawn tax-free. Coverdell accounts offer individuals a simple savings mechanism for future education expenses. While $2,000 a year may not sound like much, it adds up. Consider this: if you begin saving $2,000 a year for a child starting at birth and you earn 6% on the account, you'll have over $60,000 by the time the child turns 18.
Qualified education expenses can be either qualified higher education expenses or qualified elementary and secondary education expenses, including tuition, fees, books, supplies and equipment as well as room and board (allowable if the designated beneficiary is at least a half-time student at an eligible educational institution).
Contributions to a Coverdell ESA are not tax-deductible; however, all earnings accumulate on a tax-deferred basis and can be withdrawn tax-free if used for qualified education expenses.
Anyone can contribute up to $2,000 per child under the age of 18 for a Coverdell ESA as long as his or her income does not exceed the limits.
You have until the due date of your tax return (not counting extensions) to contribute to a Coverdell ESA.
Distributions are tax-free if used to pay for qualified education expenses. Funds must be spent or paid to the beneficiary within 30 days of their 30th birthday. Any withdrawals not used for qualified education expenses are subject to both income taxes and a 10% IRS penalty.