Coverdell Education Savings Account
You can contribute up to $2,000 each year per child. All earnings are tax-deferred. The child can use the money, tax-free, to pay for qualified education expenses.
A Coverdell Education Savings Account:
- Is set up and managed by a parent or guardian for the benefit of a minor
- Grows tax-free until distributed
- Allows tax-free withdrawals for qualified expenses
Coverdell Education Savings Account details
|Eligibility||Anyone can contribute to a child's education savings account, but the designated beneficiary must be a minor when the account is opened|
|Annual Contributions*||$2,000 per year until the child's 18th birthday; can be used for elementary, secondary, and post-secondary school expenses|
|Tax Advantages*||Earnings and withdrawals are tax-free if used for qualified elementary, secondary, and post-secondary school expenses|
|Deductibility of Contributions||None|
|Income Eligibility Requirements||
* Based on 2011 tax year
What are the advantages of a Coverdell Education Savings Account?
- Wide choice of investment options
- Low cost
- Can be used for primary, secondary and higher education expenses
- Tax-free withdrawals for qualified expenses
- Family members and corporations can contribute
- Investment control
- Beneficiary can be changed at any time
What are the disadvantages of a Coverdell Education Savings Account?
- $2,000 annual limit per child
- 10% penalty and earnings taxed if not used by age 30 or beneficiary isn't changed
- Contributions restricted or disallowed for high income donors
- May not fully fund a child's education costs
- Financial aid impact – treated as an asset of the account owner:
- If the account owner is the student, this has a high impact on financial aid eligibility. The Higher Education Reconciliation Act of 2005 added special treatment for Coverdell, Prepaid Tuition, and 529 College Savings Plan accounts owned by a dependent student. The impact on need-based aid for dependent students will therefore be minimal.
- If the account owner is the parent, this has a low impact on financial aid eligibility. Qualified distributions from a Coverdell account are not counted as income on the FAFSA and thus do not reduce financial aid eligibility.
If you have questions, please contact us at 1.800.247.8000 ext. 472.