With a Coverdell Education Savings Account (ESA), you can invest up to $2,000 per year of after-tax money into mutual funds that you choose and reallocate as needed. No federal taxes will be due on any gains in the account, provided the funds are used for qualified education expenses. Unlike a 529 College Savings Plan, a Coverdell account can be used for K–12 private school tuition and expenses, as well as for college. Qualified withdrawals are free of federal tax.
Who Offers Coverdell Education Savings Accounts?
TIAA-CREF offers Coverdell ESAs with a broad range of mutual fund investment choices. Other financial services firms offer Coverdell accounts too; however, availability tends to be limited since the maximum annual contribution limit is relatively low ($2,000).
How do I open a Coverdell Education Savings Account?
To open a Coverdell ESA with TIAA-CREF, complete the Coverdell ESA application/adoption agreement and mail it to the address provided on the form.
Who Is Eligible?
Coverdell ESAs are available for beneficiaries (students) who are under age 18 when the account is established. There are exceptions for beneficiaries with special needs. Single filers whose adjusted gross income (AGI) is $110,000 or less, or joint filers whose AGI is $220,000 or less are eligible to contribute to an account on behalf of a beneficiary (see below for salary-based contribution limits). Corporations and tax-exempt organizations can also contribute to Coverdell ESAs.
Who controls the funds?
The funds are controlled by the account owner (e.g., the parent) at all times.
What are the contribution limits?
The maximum annual contribution is $2,000 per beneficiary. Single filers with a modified adjusted gross income of $110,000 or less (220,000 for joint filers) may contribute the full $2,000. Partial contributions are available to single filers with income between $95,000 and $110,000 ($190,000 - $220,000 for joint filers).
How are Coverdell accounts taxed?
Contributions are made from after-tax dollars and are not deductible from federal taxes. A few states allow state income tax deductions on Coverdell ESA contributions; most do not. Check with your tax adviser.
What are my investment choices?
With a TIAA-CREF Coverdell account you may choose among 28 TIAA-CREF no-load mutual funds, giving you the ability to vary your mix of investments and tailor the level of risk in the portfolio to your comfort level. Consider, among other things, your particular financial circumstances, investment time frame, risk tolerance and whether or not you have other savings in place for education expenses.
What expenses qualify for reimbursement?
Qualified higher education expenses include tuition, fees, books, supplies, and equipment required for enrollment or attendance at public, private and religious elementary and secondary schools. If the designated beneficiary is enrolled at least half time at an eligible educational institution, certain room and board expenses are qualified education expenses. Expenses also include amounts contributed to a qualified tuition program for the same designated beneficiary.
How are my investments taxed?
Investment earnings, if any, accrue free of federal taxes. Withdrawals used for qualified K-12 and higher education costs of the designated beneficiary are free of federal taxes and, in some cases, state taxes as well. Withdrawals used for other purposes are subject to a 10% penalty plus income taxes on investment earnings. Exception: no penalty if the beneficiary dies or becomes disabled.
Are there age limits for withdrawal?
The balance in a Coverdell ESA must be distributed within 30 days after a beneficiary turns 30. Age limits do not apply to beneficiaries with special needs. Benefits not used by the named beneficiary can be transferred to a sibling.
How does a Coverdell account impact financial aid?
Coverdell ESA assets are generally considered to be the account owner's rather than the student's assets, which can help reduce the negative impact these funds may have on financial aid determinations. Once withdrawals begin, the assets are considered to belong to the student. Coverdell ESA withdrawals can be used in the same year as 529 college savings plan withdrawals and federal tax credits.