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  • Writer's pictureMMH CPA

Education Savings Account: Coverdell ESA

Originally named education IRAs, these type of specialized accounts are now called Coverdell Education Savings Accounts.

An education savings account is a custodial savings account created to pay for a child’s school expenses at any accredited college, university, or vocational school. The funds are also often used for elementary and secondary (K-12) school expenses at public, private, or religious schools.

Education savings accounts allow anyone, not just parents, to contribute to an account for any child under age 18. The total contributions made for each child or student cannot exceed $2,000 per year. To contribute the full amount, your income must be under a certain level.

Contributions are not deductible, but the earnings in the account are never taxed if the money is used to pay for qualifying education expenses, such as tuition, fees, supplies, required equipment, and certain room and board expenses.

Education savings account funds must be used by age 30. If the money is not spent on college by the time the beneficiary is 30 years old, the unspent money must be withdrawn (subject to income tax and a 10% penalty) or rolled over into another family member's education IRA.

In comparison to the Coverdell ESA which has a yearly contribution limit of $2,000, a 529 education savings plan usually has a lifetime contribution limit of $350,000 which varies by state. While a 529 plan might be better for higher education expenses due to the larger contribution limits, a Coverdell ESA is a great fit for K-12 expenses or if you need additional college savings outside of other options.


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