Smart Reasons to Save, Use and Invest Money

Considering A Coverdell Education Savings Account?

This Account use to be called “Education Individual Retirement Account“, which I always thought was a poor naming choice for a college savings account!!!  The plan is sometimes called an “Educational Savings Account” or an ESA.

So what are the properties of an ESA?

  • The money put into an ESA is NOT tax deductible.  So you can’t take a deduction from your taxes the year that you make the contribution.
  • A child can only have a maximum of $2,000 from all sources!!!  By this I mean if I had an ESA from my son and put $2,000 into it, that’s all the money for the year that can go into the account.  So nobody else can contribute to any ESA for that child once it hit the $2,000 mark!
  • The account must be started and all the contribution made before the child (beneficiary) is 18 years old.
  • Earning are not taxed if they are used for qualified educational expenses (elementary school, high school, or College)
  • The amount that you can contribute starts to phase out if you make more that $95,000 if you are single, and $190,000 if you are married.
  • Once a single person make over $110,000 or a married person makes over $210,000, they are no long alonger allowed to contribute to an ESA.
  • You can contribute up to $2,000 for each child.
  • Distributions from ESA’s earnings that are used for qualified education expenses* are tax and penalty free.
  • ***Distributions of contributions, is always tax and penalty free because no tax deductions are allowed for amounts contributed to an ESA.
 *qualified education expenses are expenses  such as tuition, fees, books, supplies, equipment, tutoring, uniforms, room & board, transportation, computer equipment, supplemental items and services (including extended day programs).

If you have a balance in the ESA when the beneficiary turns 30 years old, it must be distributed within 30 days.  The earnings in the account will be taxable, and a 10% penalty will hit the account too.

While this sounds like a good option, I think there might be some better options out there…  Still, it’s not bad if nothing else was out there…


7 Responses to Considering A Coverdell Education Savings Account?

  1. I never really understood why anyone would choose the Coverdell until I came across a situation where a family wanted to use 529 money for a private HS – can’t do it unless you have a coverdell

  2. @Mrs. Money
    For me, it depends. I went to a state college, and paid most of my way and was fine.

    But let’s say our kids are gifted, and end up going to a private university. Well, in those cases the cost can roll to more than $200,000 (in the next 10 years) when they are in school. No matter how hard my kids try, they aren’t going to be able to afford it without going into massive debt.

    I wish college level education wasn’t so expensive… but it is! And I say let’s prepare for it the best that we can.

    That said, I don’t think the Coverdell ESA is the best option for my family. The contribution amount is too limiting.

  3. I have a sophomore in high school now so I have been really researching colleges. I have found the following:
    1. It is hard to get money from public schools unless you are financially needy or have an athletic scholarship. For instance a friend of mine’s son is at the University of Michigan (which is 23k a year). He was top of his class, had a 35 on the ACT and did not get a dime of scholarship or aid money.
    2. Private schools may be twice as much, but they have huge endowments and many give money quite freely. Therefore, do not let the price tag of a private school scare you away.
    3. Have your child study for that PSAT. If you do well on that, then many colleges become aware of your child very quickly.

    On a separate note, I love my 529 plan. Michigan has a pretty good one,and it give me a good tax break too.

  4. @Kris
    Thanks for the tips! My 529 has just done okay… but it’s better than nothing.

    The beauty of a Coverdell is that you can invest in almost anything, stocks, bonds, etfs, mutual funds, etc… So if you are gived in that way, an ESA might be the way to go for you!