What is a Coverdell Education Savings Account?

Coverdell Education Savings Accounts (ESAs), previously referred to as the Education IRA, are custodial or trust accounts. The purpose of the Coverdell Education Savings Account is to help pay for education costs of the person designated to be the beneficiary. For instance, one might choose to go to a financial services firm or other financial institution to open a Coverdell Education Savings Account where one’s child would be the beneficiary. In that sense, the Coverdell Education Savings Account would enable a parent to help pay for the child's college education.

There are some limits to the Coverdell Education Savings Account. For instance, those who qualify to have the Coverdell include only modified and adjusted gross incomes (AGI) of less than $110,000 per year or $220,000 per year if a joint tax return is filed. Also, one can only put a maximum of $2,000 a year into a Coverdell ESA. In addition, when the Coverdell ESA is started, the beneficiary must be under 18. If the recipient has special needs or has a disability, then the beneficiary can be older than 18 but the money has to be withdrawn when the beneficiary reaches 30.

The benefit of having this type of account is that the earnings from the account can grow on a tax-free basis. An additional benefit is the fact that the Coverdell ESA can be used in combination with a 529 College Savings plan to cover education expenses for the beneficiary. Also, Lifetime Learning Credits and the Hope Tax Credit are able to be claimed during the same year in which tax-exempt distributions get taken out of the Coverdell Education Savings Account.

College expenses that can be covered with funds from a Coverdell ESA include tuition, fees, books, equipment, room and board. As long as the school is eligible to offer student financial aid programs administered through the United States Department of Education (USDE), the beneficiary could attend any university, college, vocational school, or post-secondary school. In addition to college expenses, one could also use the money from the Coverdell ESA for elementary or secondary school as well. For instance, the beneficiary can receive money from the Coverdell ESA and attend any private, public, or religious elementary or secondary school as determined under state law.