Coverdell Education Savings Accounts
Give your child the gift of education. Seeing a child work toward a college degree is a parent’s dream. But with the rapidly escalating cost of higher education, this dream can become a financial nightmare. A Coverdell Educational Savings Account (ESA) can help parents sleep at night. The main benefits of a Coverdell ESA include:
- Earnings grow on a tax-deferred basis, and distributions are tax-free if the money is used for qualified education expenses.
- Unlike state 529 plans, Coverdell ESAs can be used to pay for qualified elementary and secondary education expenses.
What is a Coverdell Education Savings Account (ESA)?
The Taxpayer Relief Act of 1997 created the Education IRA, now known as the Coverdell ESA. Its sole purpose is to help you pay for your child’s education expenses, such as tuition, fees, books, supplies, and in some cases, room and board, and computers. These options were improved by the Economic Growth and Tax Relief Reconciliation Act of 2001.
How does a Coverdell ESA work?
Contributions to a Coverdell ESA are never tax-deductible. However, a Coverdell ESA offers you potential for tax-free withdrawals-including earnings. You can make nondeductible contributions of $2,000 every year until the designated beneficiary reaches age 18. No taxes are due on withdrawals used for qualified higher-education expenses.
When your children are young, it’s hard to imagine them strolling a college campus or cramming for final exams. It’s never too early to begin saving when funds could be growing tax-free in a Coverdell ESA.