Coverdell Education Savings Accounts

The Coverdell Education Savings Account lets you set aside up to $2,000 per year for the beneficiary and can be used tax-free not only for college, but for K-12 expenses as well. The student beneficiary must be under age 18 when the account is created.

There are some limitations:

• Each ESA has a custodian – usually the financial institution where the account is located.
• The individual opening the account can make decisions on contributions and distributions, but distributions are always paid to the student beneficiary.
• If any money is left in the account when the student reaches age 30, the balance must be paid out at that time. Any amount that is distributed for reasons other than qualifying expenses is considered taxable income, and any taxable distributions will also be subject to an additional 10% tax.

A Coverdell ESA is considered a parent’s asset by the financial aid system, just like a 529 savings plan. But where you may get a state tax deduction for a 529 plan, it’s unlikely you’ll see any state tax breaks for an ESA.