Coverdell Education Savings Account
A Coverdell Education Savings Account (ESA) is our most flexible, tax-advantaged, investment savings account. It offers more investment options than similar savings plans and can also be used for K-12 qualified educational expenses.
Best if you
- Need an easy way to save for your children's education
- Are committed to using the funds for education expenses only
- Want to save for a student with special needs
- There is no limit on the number of separate accounts that can be set up for a beneficiary
- Earnings grow tax free
- Funds can also be used for qualified K–12 expenses
Understand the fine print
It may be helpful to consider some of the contribution and withdrawal requirements when deciding if the Coverdell ESA is right for you.
The basic rules for contributions to a Coverdell ESA are simple.
- There can be only one beneficiary per account, and the beneficiary must have a Social Security or Tax ID number, and be under the age of 18.
- The contribution limit is $2,000 per year, per beneficiary.
- Contributions may be made past the age of 18 for special needs beneficiaries.
- Anyone can contribute, as long as their adjusted gross income is under $110,000 (if single) or $220,000 (if married, filing jointly).
- Accounts can be funded by FDIC-insured savings or investments.
- Contributions are not tax deductible.
- Students must be enrolled full-time, half-time or part-time in public, private or religious primary or secondary school.
Coverdell ESA distributions must be used to pay qualified education expenses of a designated beneficiary.
- A beneficiary can take a distribution at any time.
- Distributions are federal-tax free if used for qualified educational expenses.
- Funds must be distributed by the beneficiary’s 30th birthday, or they can be rolled over into a new Coverdell ESA for a new beneficiary.
- Funds can be used for qualified education institutions and expenses, including tuition and fees, room and board, books, supplies, uniforms and computer equipment.
- Distributions are tax free if they are equal to or less than the amount of adjusted qualified education expenses the beneficiary has in the same tax year.
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How much will college cost?
It's no secret that college is expensive. But if you have a handle on the costs of attending college, you'll be better able to set your savings goals.
Know all of the costs
College is expensive, and the price continues to go up. For the 2015–2016 school year, the average cost for one year of tuition, room and board at a 4-year in-state school was $19,548, up 3.1% from the previous year. The same cost for a year at a private nonprofit 4-year school was $43,921, a rise of 3.3%.*
With these figures getting larger every year, you’ll need a plan to pay for college. You can establish a more accurate savings plan when you understand all of the costs involved.
- Tuition and fees – includes enrollment and instructional expenses
- Room and board – includes your residence at the school, your meal plan and other living costs that vary by school (some of them may even include laundry)
You’ll also have additional expenses for:
- Computer equipment
- Mobile devices
- Spending money
Look for financial aid
Here’s the good news: You may be eligible for financial aid from the government and possibly from the college itself. Financial aid is intended to fill the gap between what your family is expected to pay and the actual cost of college. It can take the form of grants, loans and work study.
The amount your family is expected to pay, called your Expected Family Contribution (EFC), is derived by applying a formula based on information you provide in the Free Application for Federal Student Aid (FAFSA), which you have to complete every year. It includes questions concerning your income, assets, family size and the number of people in your household currently attending college.
More good news: Your EFC does not change, regardless of the college. For example, if your EFC is $15,000, you'll be expected to contribute $15,000; it doesn't matter if the college costs $19,000 or $40,000.
Start a 529 college savings plan
529 plans are an increasingly popular way to save for college. Named after Section 529 of the Internal Revenue Code, these plans offer unique tax advantages and flexibility that are ideal for college savings.
- No income restrictions for contributions
- Tax-free earnings
- Tax-free withdrawals for qualified higher education expenses
- No age restriction for beneficiaries
- Variety of investment or FDIC-insured savings options
You can open a 529 account for your child, grandchild—even yourself! And unlike the Coverdell Education Savings Account, there are no income restrictions. Contribution limits per beneficiary vary by state for 529 accounts. Earnings on the account grow tax-free, and depending on where you live, you may also qualify for state tax deductions.**
Before selecting the account owner, be sure you understand how this decision may impact financial aid. When determining your EFC, funds in an account owned by the student will be assessed at 20%, meaning that 20% of the 529 plan savings are considered available to pay for college. But if the 529 is owned by the parent, the funds will be assessed at a maximum of 5.64%. So in most situations, it makes the most financial sense for the parent to own the 529 account.
* Source: The College Board. Trends in College Pricing 2015, Published Charges over Time, Table 2B.
** See your tax advisor for rules governing tax deductibility in your state.