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Get tax-deferred growth for your money

The Coverdell ESA (also known as an ESA) was introduced before 529 plans and the two are similar in several ways. Your money is invested and it grows tax-deferred. If it’s withdrawn for an eligible education expense (tuition, books, etc.), you can withdraw the money tax-free. You can also use Coverdell ESA funds for certain kindergarten – grade 12 expenses, like school uniforms and computers. You can contribute to the ESA until your student turns 18. You can open a Coverdell ESA at a bank, credit union, or brokerage firm.

Coverdell ESAs were set up to help lower-income families save, so there’s a limit on the family income to open an account. In 2016, an individual (including the beneficiary) needed a modified adjusted gross income of less than $110,000 ($220,000 for a joint return).

You can contribute $2,000 each year if your modified adjusted gross income is $95,000 or less ($190,000 or less if filing jointly). If it’s between $95,001 and $110,000 ($190,001 and $220,000, if filing jointly), your contribution will be reduced.


Coverdell ESA restrictions

There are certain restrictions for Coverdell ESAs that may not be found in other college savings plans:

  • The account is for the sole benefit of the child; distributions are paid to the beneficiary, not the account owner.
  • Any unused money in the account is distributed to the beneficiary when he/she turns age 30. (If it’s not used for eligible education expenses at that time, there may be tax liabilities and penalties.)

Benefits of Coverdell ESAs

  • Tax benefits are available.
  • The account can be used for eligible K – 12 expenses, not just college.

Considerations of Coverdell ESAs

  • There may be fees.
  • The beneficiary has control of the funds when they turn 18.
  • You need to meet the income limitations to open a Coverdell ESA.
  • There is a low limit for annual contributions.

As with any investment, be sure to check with your financial or tax advisor before opening an account.

 https://www.irs.gov/publications/p970/ch07.html

 http://www.finra.org/investors/coverdells-and-custodial-accounts