What is a Coverdell ESA?
A Coverdell ESA is a trust or custodial account created or organized in the United States only for the purpose of paying qualified education expenses of the account.
When the account is established, the designated beneficiary must be under the age of 18 or a special needs beneficiary.
Tax benefits of a Coverdell ESA
Contributions to a Coverdell ESA are not deductible but the amounts deposited in the account grow tax free until they are distributed.
Expenses you can use a Coverdell ESA
Generally, these expenses required for the enrollment or attendance of the designated beneficiary at an eligible education institution. The expenses can be either qualified higher education expenses or qualified elementary and secondary education expenses. Items such as tuition, fees, books, supplies, tutoring, special needs services, room and board, uniforms, transportation are just some of the possible qualifying items that can be used with a Coverdell ESA
Any individual can contribute to a Coverdell ESA if the individual’s MAGI for the year is less than $110,000 for individuals and @220,000 for individuals filing joint returns. Organizations such as corporations and trusts can also contribute to the accounts.
Coverdell ESA vs State 529 Plan
|529 Plan||Coverdell ESA|
|Who may be a beneficiary?||Anyone||A beneficiary is someone under age 30 or is a special needs beneficiary|
|How much can you contribute?||Determined by each state||$2000 annually for 2013 until the beneficiary reaches the age of 18|
|Can the beneficiary be changed?||Yes, if you are the account owner.||Yes, if you are the account holder.|
|Who is the money controlled by?||State Government||You, the account holder|
|Does the account hlder maintain control over the distribution of assets?||Yes||Yes|
|Are qualified withdrawals exempt from federal income tax?||Yes, if used for qualified education expenses||Yes if used for qualified education expenses|
|What is the consequence of using for non-qualified expenses?||Withdrawn earnings subject to federal tax and 10% penalty||Withdrawn earnings subject to federal tax and 10% penalty|
|What is a qualified education expense?||Qualified college expenses only such as: tution, fees, books, supplies, equiptment, special needs, room and board||Qualified elementary, secondary college, and post-graduate education expenses such as: tution, fees, books, supplies, equiptment, special needs, room and board|
|What is the impact on financial aid?||A parent-owned 529 Plan is reported as a parent asset on the FAFSA. If owned by the grandparent, it is not included in the FAFSA||A parent-owned Coverdell ESA is reported as a parent asset on the FAFSA. If owned by the grandparent, it is not included in the FAFSA|
|Can it be self-directed?||NO||YES|
Want to learn more about Coverdell ESA?
If you are interested in learning more about a Coverdell ESA or your children’s education, please contact us using the form on this page.