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Coverdell Savings Accounts

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With tuition rates on the rise every year, the financial obligations of higher education can seem daunting.  Luckily, a Coverdell Education Savings Account (ESA) provides a dedicated place to grow savings. A Coverdell ESA is the safe, smart way to help pave the way to your child's success.

  • No set-up fees or annual maintenance fees.
  • $2000 annual limit is in addition to the $2,000 per year total allowed for traditional IRA and Roth IRA contributions.
  • Your Coverdell Education Savings Account can not only be used for higher-education expenses, but also for K-12 costs.
  • Accounts Federally Insured to $250,000 by NCUA an agency of the U.S. Government.

Is a Coverdell ESA a useful way to save for my child's future?
If you've questioned whether it was worth con­tributing to a Coverdell Education Savings Account in the past, you may want to reconsider now that it's new and improved. The key advantage of a Coverdell ESA remains the same - tax- and penalty-free withdrawals (including earnings!) for qualified education expenses. You can put $2,000 per child, per year into an Coverdell ESA instead of the previous $500 limit. And qualified expenses apply to not only college costs, but also to primary and secondary education. By putting $2,000 into an Coverdell ESA every year for 10 years, you'd have $59,000 with a 5% return. This is $44,000 more than you would've had by contributing $500 given the same time period and return.

Am I eligible to contribute to an Coverdell Education Savings Account?
Anyone with a modified adjusted gross income (MAGI) of $110,000 per year or less can contribute to an education account. To calculate your MAGI, you will add back certain of the deductions used to compute your adjusted gross income (AGI) on tax return forms 1040, 1040A, 1040EZ or 1040NR.
 
If you're married and you file a joint tax return, you are eligible to make contributions with an income range for contributions by joint filers of $190,000 to ­$220,000. Any joint filers within the range can make partial contributions to an Coverdell ESA. Joint filers with income under $190,000 can contribute the full $2,000 per year, per child.

Single filers with income of less than $110,000 are eligible. Maximum $2,000 annual contributions are allowed.

When is the contribution deadline for Coverdell Education Savings Account?
Currently the contribution deadline is the federal income tax deadline. For example, Coverdell ESA contributions for 2015 will be allowed until April 18, 2016 - just like contributions to traditional and Roth IRAs. So now you have even more time to make sure you set aside that money your child needs for primary, secondary or college education expenses.

Can I use my Coverdell Education Savings Account to fund my child's private elementary school costs?
Yes, you can. Coverdell ESAs can be used not only for higher-education expenses but also for K-12 costs. And qualified primary and secondary educa­tion expenses aren't limited to just tuition, fees and room and board. They also include uniforms, transportation, extended day care, and even home computers. With more qualified reasons for tax and penalty-­free withdrawals, Coverdell Education Savings Accounts are a smarter way than ever to help fund your child's education.

Can I use an Education IRA in combination with other education savings incentives?
Under the old rules, contributions to and distribu­tions from an Coverdell Education Savings Account prevented the use of other tax-favored options in the same year - including the Lifetime Learning and HOPE Scholarship tax credits. In the current tax year you can claim either of these credits for your child and exclude from gross income any amounts distributed from that same child's Coverdell ESA. The only caution is you can't claim a credit and take an Coverdell ESA distribution for the same expenses in the same tax year. In other words, you couldn't use both for schoolbooks - but you could use one for schoolbooks and one for tuition. The new rules also let you put money into a 529 state college savings plan in the same year that you contribute to an Coverdell Education Savings Account - or withdraw from both in the same year.

What do we do with Coverdell ESA funds if our child decides not to go to college?
Withdrawals of earnings from a Coverdell Education Savings Account are only tax-free if they're used for qualified K-12 or higher­ education expenses. But you can roll any unused funds into the Coverdell ESA of a family member. That not only includes siblings and step-siblings of the original Coverdell Education Savings Account beneficiary, but also nieces, nephews, spouses, children, and other relatives. The magic number is 30 - the new beneficiary must be under age 30 at the time of the rollover and must use the funds before he or she turns 30.

*Consult a tax professional regarding your specific circumstances.