Special Accounts for Education Saving can help saving for college 

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A Coverdell Education Savings Account (ESA) has similar benefits to the more well-known 529 Savings  Plan.

 

Like a 529 college savings account, a Coverdell is a savings account with special tax status to encourage and reward saving for qualified education expenses.   

 

Deposits to both a Coverdell and a 529 account grow tax free until distributed and withdrawals are tax-free when used for qualified educational expenses.   

 

Very different are the requirements for contributing to and withdrawing funds:

 

 

Coverdell

• K-12 and college qualified expenses  

• $2,000 limit on total annual contributions

• Beneficiary must be younger than 18 

• Contributions are not tax deductible.

• Beneficiary must be under 18

• Funds must be withdraw by age 30

• Modified adjusted gross income must be less than $110,000 ($220,000 joint)

 

529 PLAN

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• College qualified expenses only

• No annual contribution limit

• No age restriction on beneficiary

• Contributions may be state-tax deductible

• No age limit on beneficiary

• No time or age limit on withdrawals

• No income limit to establish account

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If you qualify you may set up both a Coverdell and a 529 for each student beneficiary. 

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Alert: Withdrawals are only tax-free if used to pay qualified education expenses. The earnings portion of all non-qualified withdrawals will be subject to income tax plus a 10 percent penalty tax. 

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Other pieces in this series: 1. How to manage college savings plans for financial aid eligibility; 2. Leveraging 529 accounts a gift and estate tool; 3. Weighing a state tax deduction against 529 plan performance, 4. How to determine if you are eligible for education tax credits.

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