Definition
A Coverdell Education Savings Account, or Coverdell ESA, is a tax-advantaged savings account that can be used to pay for qualifying educational expenses of a designated beneficiary. A Coverdell ESA can be established for anyone under the age of 18, or anyone that is designated a special needs beneficiary.
Explanation
Contributions to a Coverdell Education Savings Account are not tax deductible; however, the earnings are allowed to grow tax-free until withdrawn. Distributions from a Coverdell are tax-free as long as they do not exceed the beneficiary's adjusted qualified educational expenses. In addition to the costs associated with attending colleges and universities, a Coverdell ESA can also be used to pay for tuition at elementary and secondary schools.
Generally, contributions can be made to a Coverdell as long as the taxpayer's Adjusted Gross Income, or AGI, is less than $110,000 for individual filers or $220,000 for those filing joint returns. Coverdell ESAs offer more flexibility when compared to 529 plans, allowing account investments in stocks, bonds and mutual funds.
The account balance must be fully withdrawn by the time the beneficiary reaches 30 years of age. Since 2002, the contribution limits for a Coverdell ESA has been $2,000 per beneficiary. Additional information, including up-to-date contribution limits can be found in our article: Coverdell Education Savings Account.
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