What is the Coverdell Education Savings Account?

Answer:
A Coverdell Education Savings Account, or Coverdell ESA,

is a savings tool used for education expenses that allows savings to grow tax-deferred over time. In fact, if the savings are used for qualifying educational expenses, no tax is owed. Coverdell ESAs allow savings to be used both for higher education as well as elementary and secondary education.

Coverdell Education Savings Accounts are subject to certain limits and restrictions. For example, a beneficiary can only have $2000 per year contributed to his or her Coverdell ESA regardless if there are multiple ESAs naming this person as the beneficiary. In addition, contribution limits based on the taxpayer’s modified gross adjusted income also affect how much any taxpayer can contribute to the Coverdell ESA.

If the funds are withdrawn for non-qualified educational expenses, income tax is due on the earnings and a 10% penalty applies. In addition, the funds must be used within 30 days after the beneficiary’s 30th birthday or taxes and penalties will apply. To avoid this, the funds can be rolled over to the Coverdell ESA of another family member.