What Is a Coverdell Education Savin▨gs Account (ES♏A)?

A Coverdell Education Savings Account (ESA) is a trust account created by the U.S. government to assist families in funding educational expenses for beneficiaries who must be under the age of 18 when the account is established. The age restriction may be waived for special needs beneficiaries. While more than one ESA can be set up for a single beneficiary, the total maximum contribution per year for any single 澳洲幸运5官方开奖结果体彩网:beneficiary is $2,000.

How a Coverdell🔜 Education Savings Acc♚ount (ESA) Works

Formerly called an 澳洲幸运5官方开奖结果体彩网:education IRA, the ESA allows families to increase investment earnings as long as the funds are used for educational purposes. When the contributions are distributed, they're tax-free as long as they're less than the account holder's annual adjusted qualified education expenses, including tuition, books, equipment, special needs services, and even academic tutoring. ESA account funds can be used for primary and secondary schools (grades K–12) as well as higher education.

If 澳洲幸运5官方开奖结果体彩网:distributions are higher than the expenses, the gains are taxed at the account holder's rate, rather than the contributor's rate, which is typically higher. The Coverdell ESA is restricted to families below a certain income level based on their 澳洲幸运5官方开奖结果体彩网:adjusted gross income (AGI). The AGI requirements are $110,000 or below for single taxpayers and $220,000 or below for married taxpayers for the full $2,000 contribution limit. The contribution limit is lower for higher earners and is phased out for single taxpayers with an AGI of $110,000 or more and for joint filers with an AGI of $220,000 or more.

Coverdellཧ Education Savings Accounts vs. 529 Plans

ESAs may be established at brokerages and other financial institutions. These accounts are comparable to the 529 tax-free college savings plan. It's permissible to have a 529 plan as well as an ESA for the same beneficiary’s education expenses. However, there's no annual limit on the amount that may be deposited into a 529 plan.

Upon the beneficiary reaching age 30, any remaining funds in the ESA must be disbursed, unlike a 529 plan. The exception to this rule is if the beneficiary of the ESA qualifies as a special needs beneficiary.

529 plans can be used to pay off up to $10,000 in student loans and to pay for qualified expenses related to apprenticeship programs approved by the U.S. Department of Labor. The SECURE 2.0 Act introduced the option to rollover $35,000 of an existing 529 into a Roth IRA. There are no restrictions on the income level of the contributors to a 529 plan; however, fees may apply to 529 accounts and the 澳洲幸运5官方开奖结果体彩网:investment has no guaranteed returns.

The Bottom Line

The Coverdell Education Savings Account (ESA) was created to help pay for educational expenses for qualified families. The account must be established before the beneficiary turns 18. The maximum annual contribution is $2,000 and must be used by the time the beneficiary is 30 years old.