What is a Coverdell ESA?
A Coverdell Education Savings Account (or Coverdell ESA), is an investment account with tax advantages and designed to promote savings to cover future college costs.
Key Features of Coverdell Education Savings Accounts
A Coverdell ESA (formerly called an Education IRA) is the most attractive way to save for K-12 or higher education expenses, including UGMA/UTMAs and mutual funds. However, there are income requirements that preclude some upper income families from participating.
Coverdell ESAs, in addition to tuition, covers transportation costs and uniform expenses. Additionally, Coverdell funds may be used for items such as computers and academic tutoring for children in grades K-12 at both public and private schools, in addition to tuition, fees, books, supplies, room and board for college. Another benefit of Coverdell is the added discretion that the account holder has over the investment direction of the funds in the account, which can be more freely allocated among stocks, bonds and mutual funds.
Coverdells have certain provisions that prevent some from participating. Among them is the fact that the $2,000 maximum contribution applies to both the account holder and the beneficiary. In practice, the beneficiary can only have a total of $2,000 contributed to his or her account in any given year, regardless of the number of contributors to that account. In addition, the account holder can only make a maximum contribution of $2,000 per beneficiary.
Excerpted from articles written by Jim Boyle, President of College Parents of America.
Saving for College