A Coverdell Education Savings Account (ESA) helps you invest for a child’s future educational expenses – from elementary school through post-secondary. You can invest in a broad variety of stocks, bonds, mutual funds, and ETFs. The interesting part is that money withdrawn to pay for qualified education expenses is tax-exempt.
A Coverdell ESA also includes some unique benefits for special needs children.
Key FeaturesThere are several features of a Coverdell ESA that make it different from other custodial accounts.
- When you set up your account, the person named as beneficiary must be either under 18 or a special needs beneficiary.
- The amount you are allowed to contribute depends on your Modified Adjusted Gross Income. More than one Coverdell ESA can be set up per child, but the combined contributions to all accounts cannot exceed $2,000 per year.
- The amounts contributed to the account are not tax-deductible but they have the potential to grow tax deferred in the account.
- Money withdrawn is called a distribution which is federal income tax-free when used for qualified educational expenses. These usually include books, tuition, supplies, and related qualified expenses such as room and board. Elementary and secondary school expenses may also be qualified.
- If the distribution is for non-qualified education expense, it will be taxable and subject to an additional 10% penalty, unless an exception applies, and there may also be a state tax penalty.
- Unless the beneficiary has special needs, the account must be closed when the beneficiary reaches age 30.
- The account is considered the child’s asset for financial aid.
In 2014, your Modified Adjusted Gross Income (MAGI) is $95,000 or less for single filers; to $190,000 or less for joint filers. These income limits let you make the full $2,000 annual contribution. You can make contributions of less than the full amount if you are a single filer with MAGI between $95,000 and $110,000 or a joint filer with MAGI between $190,000 and $220,000.
The tax information herein is not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding tax penalties. Taxpayers should seek advice based on their own particular circumstances from an independent tax advisor.
Neither Voya nor its affiliated companies provide tax or legal advice. Please consult with your tax and legal advisors regarding your individual situation