Coverdell Educational Savings Account (ESA)

College tuition is expensive – and it’s not getting any cheaper. Thankfully there are a few programs out there which make it easier to save for college. This is especially important if you if you are saving for your child’s tuition and will not be able to use your GI Bill benefits to help pay…
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College tuition is expensive – and it’s not getting any cheaper. Thankfully there are a few programs out there which make it easier to save for college. This is especially important if you if you are saving for your child’s tuition and will not be able to use your GI Bill benefits to help pay for your child’s college. Yesterday, we looked at the 529 College Savings Plan, which is a great way to save for college tuition. Today we are going to look at another college savings plan that offers tax benefits.

Coverdell Educational Savings Account (ESA)

Once called an Education IRA, a Coverdell Educational Savings Account (ESA) is named after Senator Paul Coverdell, who introduced this college savings plan.  Coverdell ESAs are similar to IRAs, but they are designed to save money for education rather than retirement.  Because of this, the name was changed for Education IRA to Coverdell ESA, to more accurately reflect what the money is being saved for.

How the Coverdell ESA Works

A Coverdell ESA is a savings or investment account for college tuition. You can open an account through a mutual fund company, bank, or brokerage firm, choose the investments, and then send in contributions.  The person who opens the account is considered the “responsible person” and controls the money and investments until the beneficiary reaches the age of majority for the state in which they live in.  For most states, this is the age of 18.

Contribution limits. Annual contribution limitations for Coverdell ESAs are $2,000 per student, however, contribution limits may be limited based on the modified adjusted gross income (MAGI) of the person making the contributions. Here is additional information about contributions:

  • Anyone can contribute up to $2,000 in a Coverdell ESA for the benefit of someone under the age of 18, unless you exceed income limitations.  For single tax filers, if you make more than $110,000 annually you will not be able to contribute personally into a Coverdell ESA.  For joint tax filers, you must make less than $220,000 per year to contribute.
  • There is also a phaseout income range which allows for lower contribution amounts. This is based on a MAGI for single filers: $95,000 and $110,000; or income between $190,000 and $220,000 for joint filers.
  • If you exceed the income limitations for contributing to a Coverdell ESA, you can give the money as a gift to the student beneficiary, who can then contribute or open the ESA themselves.

Tax Benefits of Coverdell ESAs

Coverdell ESA contributions are not tax deductible, but earnings and withdrawals from a Coverdell ESA are tax free as long as distributions from the Coverdell are made for qualified educational expenses.  Qualified expenses include college costs, but can also extend to private schools at the elementary or secondary school levels, uniforms, computers, and transportation for education purposes.

If a beneficiary of a Coverdell ESA uses the money for anything other than qualified education expenses, they are subject to both a 10% penalty and the money is treated as ordinary income at tax time. Money in Coverdell ESAs must be used by the time the beneficiary is 30 years old, whether it is used for qualified educational expenses, used for non-qualified expenses and assessed a 10% penalty, or transferred to a relative.

How to Choose a Coverdell ESA

Just like any other investment, the Coverdell ESA can be opened through brokerage firms, banks, or mutual fund companies.  You’ll want to compare fee structures and commissions when making your selection, as well as the types of investments to include. Here is additional information on where to open a Coverdell ESA Plan.

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About Ryan Guina

Ryan Guina is The Military Wallet's founder. He is a writer, small business owner, and entrepreneur. He served over six years on active duty in the USAF and is a current member of the Illinois Air National Guard.

Ryan started The Military Wallet in 2007 after separating from active duty military service and has been writing about financial, small business, and military benefits topics since then. He also writes about personal finance and investing at Cash Money Life.

Ryan uses Personal Capital to track and manage his finances. Personal Capital is a free software program that allows him to track his net worth, balance his investment portfolio, track his income and expenses, and much more. You can open a free Personal Capital account here.

Featured In: Ryan's writing has been featured in the following publications: Forbes,, US News & World Report, Yahoo Finance, Reserve & National Guard Magazine (print and online editions), Military Influencer Magazine, Cash Money Life, The Military Guide, USAA, Go Banking Rates, and many other publications.

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