Savings and Tax Plans
Coverdell Education Savings Accounts:
FAQs
- What is a Coverdell Education Savings Account (ESA)?
- Can I fund a 529 plan and a Coverdell Education Savings Account?
- What can a Coverdell ESA do for me that a 529 plan cannot?
- Are there contribution limits?
What is a Coverdell Education Savings Account?
Formerly known as the Education IRA, Coverdells enable you to
make an annual non-deductible contribution to a specially-designated investment
trust account. Your account grows free of federal income taxes and withdrawals
from the account are completely tax-free. There are certain requirements
and restrictions which make them somewhat less flexible than 529 plans,
such as a AGI (Aggregate Gross Income) clause which does not allow parents
whose combined AGI exceeds $190,000 to contribute to this account.
Can I fund a 529 plan
and a Coverdell Education Savings Account?
As of 2002, you can fund both a 529 plan and Coverdell
Account.
What can a Coverdell
ESA do for me that a 529 plan cannot?
The big plus we see in Coverdell is that the funds may be used
tax-free to pay for qualified K-12 educational expenses as well as higher
education costs. 529 plan funds cannot be used for this purpose without
penalty.
Are there contribution
limits?
There is a $2,000 per year per beneficiary limit on contributions.
However, that is much better than the previous limits prior to 2002 of
$500 per year.
- Coverdells and 529 Plans
With the passage of the EGTRA, families can contribute to both savings plans in the same year, whereas prior to January 2002 it was either a Coverdell ESA or a 529 plan. Moreover, you can rollover funds into a 529 plan. - Financial Aid Perspective
When it comes to college financial aid eligibility, Coverdells count as student assets, which is not nearly as favorable as 529 plans.
