Coverdell ESA (Education Savings Account)

If you’re a parent who wants to save money for your child(ren)’s education, you might want to consider opening a Coverdell ESA for each child.

For each child under the age of 18, you can contribute up to $2,000 a year to a Coverdell ESA. Contributions are not tax-deductible but the money in the account does grow tax-free and qualified distributions are also tax-free, kind of like a Roth IRA.

Qualified distributions include using the money for postsecondary tuition, fees, books, supplies, and basic room and board or $2,500 per year for off-campus away-from-home students. The Coverdell ESA can also be used to pay for K-12 expenses like tutoring, computer equipment, room and board, uniforms, and 529 contributions. We will talk about 529s in depth another time.

If the money is used for non-qualified education expenses (getting your nails done, watching a movie, Disneyland tickets…), you will have to pay taxes and penalties.

The balance of the account has to be completely distributed when the beneficiary (your child) reaches the age of 30. But if you don’t want to give your 30 year old child the remaining balance, you can roll it into another Coverdell ESA for a family member that’s related to them (i.e. their sibling who is still in school, their child/your grandkid, etc.).

A couple other things to note:

  • If you’re married and your modified AGI is over $220,000, you are considered phased out (i.e. you can’t make any contributions).  If your modified AGI is more than $190k but less than $220,000, you can make a contribution but not the full $2,000.  If you’re single, the limits are $95,000 and $110,000.
  • The annual deadline to make this contribution is when your tax return is due for that year (not including extensions).  For example, if you want to make a 2016 contribution, you have until April 15, 2017 to do so.

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