Coverdell Education Savings Account
A Coverdell Education Savings Account, also known as an Educational Savings Account and formerly referred to as an Education IRA, is a tax-advantaged investment account for future college expenses. It is located in section 530 of the IRA Code.
Coverdell ESA’s are quite similar to 529 Plans but there are a few important differences.
Similarities to 529 Plan:
- Both allow money to grow tax deferred and the money can be withdrawn tax free for qualified educational expenses.
- With both plans, the money is considered the beneficiary’s money when applying for financial aid and can reduce the amont of aid they would receive.
- A new beneficiary can be named by the account custodian at any time
Differences from a 529 Plan:
- Coverdell ESA’s have lower contribution limits. $2,000 per child per year for an ESA, no yearly limit for a 529.
- ESA’s allow almost any investment option, including stocks and bonds, while 529’s only allow a select number of government allocation programs.
- ESA’s can be used for primary and secondary school expenses, 529’s can not.
- Donor income level may affect contribution limits with a Coverdell ESA, but not with a 529 Plan.
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June 26th, 2007 at 12:22 am
Can a coverdell education savings account be started for a child prior to conception?
July 9th, 2007 at 3:50 pm
Katie,
Yes it can.
July 19th, 2007 at 11:28 pm
My wife is due in December. We would like our child to go to private primary and secondary schools. It sounds like the Coverdell would be ideal for this pupose, but I’ve heard that Coverdell contributions will be restricted to $500 beginning in 2011, and that the funds can no longer be used for primary and secondary school costs at that time. Is this correct? If so, what would happen to contributions made before 2011 in the years 2011 and later? Would they all have to be used for college, or could pre-2011 contributions be used for primary and secondary eduction in the year 2011 and beyond? In other words, would investing in a Coverdell for primary and secondary education for a child who won’t be in primary education until at least 2012 be a waste of time?
July 23rd, 2007 at 2:27 pm
Steve,
Unless Congress steps in, it looks like the Coverdell will be becoming much less attractive after 2010. You can contribute to a Coverdell and under current laws, you would be allowed to roll those monies over into a 529 plan if the changes do go through.
February 18th, 2008 at 2:31 pm
It’s also worth noting K-12 expenses will no longer qualify also.
April 9th, 2008 at 8:57 pm
Is there an age limit at which hte beneficiary cannot contribute to their own Coverdell/530?