Coverdell Education Savings Account Tutorial

Saving for education is a key concern of most parents. Tax-advantaged savings programs like a 529 plan can help with that job. But if your plans include K-12 private-school tuition as well as college, a 529 account won't fund that part of your child's education. That's when you need to learn about the Coverdell Education Savings Account (ESA). 

The Coverdell is a tax-advantaged fund that allows you to save for these expenses. It allows parents, grandparents and other individuals to contribute up to $2,000 per year total on behalf of an eligible student under the age of 18. Those funds can be withdrawn tax-free when used for qualified education expenses. All funds in an ESA must be distributed within 30 days of the beneficiary’s 30^th birthday.

Note: A student may have multiple ESAs but total contributions for the year cannot exceed $2,000. The age restrictions on contributions and tax-free withdrawals are waived for beneficiaries with special needs. The waiver allows ESA contributions to be made after age 18 and assets can remain in the account past age 30.

Contributions aren’t tax-deductible for savers, but a Coverdell ESA can yield important tax advantages. If you were to deposit $2,000 into an ESA earning a 4% return, the taxes on the original contribution would already have been deducted from your paycheck. When those funds are withdrawn for qualified education expenses, no taxes would be due on the earnings, unlike a regular savings or investment account.

If you’re looking for a tax-advantaged way to save for K-12 schooling and higher education expenses, this tutorial explains how to open and contribute to a Coverdell ESA and avoid tax penalties.