Coverdell Education Savings Accounts

Coverdell Education Savings Accounts are alternatives to 529 plans for college savings. Coverdell Education Savings Accounts are different from 529 plans in many ways. In this section of 529 Plan website, we discuss Coverdell Education Savings Accounts as an alternative way of saving for college.

Coverdell Education Savings Accounts: An overview

With the rising cost of higher education, many families must plan for college savings to build a fund for their children's college expenses. The Coverdell Education Savings Accounts or ESAs were created solely for this education savings purpose. The Coverdell Education Savings Accounts will help many families prepare for this financial challenge.

Beginning January 1, 2002, taxpayers may deposit up to $2,000 per year into a Coverdell Education Savings Account ("ESA") for a child under age 18 (or a special needs student of any age).

Parents, grandparents, other family members, friends, and a child him/herself may contribute to the child's Coverdell Education Savings Account, provided that the total contributions for the child during the taxable year do not exceed the $2,000 limit and the individual contributor's income does not exceed certain limits.

Corporations and other entities may make contributions to Coverdell Education Savings Accounts without being subject to the income limits. Contributions to Coverdell Education Savings Accounts may grow tax-free until distributed. The child will not owe tax on any withdrawal from the account if the child's qualified education expenses for the year equal or exceed the amount of the withdrawal.

If the child does not need the money for education, the Coverdell Education Savings account balance can be rolled over to the ESA of certain family members who can use it for their qualified education expenses. Earnings allocated to amounts withdrawn from a Coverdell Education Savings Account or ESA that exceed the child's qualified education expenses in a taxable year are generally subject to income tax and to a penalty tax of 10 percent.

Coverdell Education Savings Accounts: Eligibility

Anyone whose AGI (Adjusted Gross income) is not in excess of $220,000 (joint returns) or $110,000 (single returns) may contribute to a Coverdell Education Savings Account on behalf of a designated beneficiary who has not reached the age of 18.

Coverdell Education Savings Accounts: Establishment Deadline

The deadline for establishing a Coverdell Education Savings Account is the tax filing due date, no extensions.