Coverdell Education Savings Accounts

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Coverdell Education Savings Accounts

Coverdell education savings accounts (also known as Education IRAs. It is also commonly misspelled as Coverdale) are used to save for education or college expenses. The money in the Coverdell grows tax deferred as long as the funds are used for qualified education expenses.

Distributions can be used to pay for elementary and secondary school expenses. This means kindergarten, through 12th grade and college or trade schools.

Coverdells and 529 plans

You can contribute to a Coverdell education savings account AND contribute to a 529 plan at the same time. One of the great advantages to a Coverdell account is that you can decide exactly which investment vehicle to invest in. For most people this would be a mutual fund. With a 529 plan, you have to invest in the specific funds that each state selects.

Another major advantage over 529 plans are expenses. Some state 529 have outrageous fees, both in sales commissions and ongoing yearly management expense ratios. You get to select the mutual fund when you open up a Coverdell education savings account.

Also, unlike a 529 plan, you can use the funds from a Coverdell account for kindergarten through 12th grade.

Other Coverdell Education Savings Account Considerations

  • The maximum contribution for each beneficiary is currently $2,000 a year. (It used to be only $500 a year prior to 2002, making this a much more viable savings vehicle for college!). A 529 plan does not have annual limits.
  • Contributors must earn less than $220,000 for married couples and $110,000 for single filers in order to be eligible to make contributions.
  • Contributions are not federally tax deductible. Only a small number of states allow deductions.
  • Contributions to a Coverdell education savings account can be made until the tax filing deadline (Usually this is April 15), not including extensions. For example, if you wanted to make a contribution for the 2004 tax year, you have until April 15, 2005 to fund the account!
  • The Coverdell account must be completely withdrawn by the time the beneficiary reaches 30 years of age. If the account still has a balance beyond that point, the balance is subject to taxes and penalties.
  • Contrary to what I have read on some sites, the money in a Coverdell education savings account are the assets of the custodian. These accounts receive the same treatment as 529 plans when applying for federal financial aid.

For additional information on Coverdell education savings accounts check out these helpful sites:

  1. TIAA-CREF's page on Coverdell ESAs
  2. Independent529plan.org's comparison of college savings plans This site has a great summary outlining the differences between 529's, Coverdell's and custodial accounts.

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