Funding a university or college education can be difficult. In addition to pursuing all the scholarships and grants you can, it’s important to know how to make your savings work for you.
A Coverdell Education Savings Account (ESA) is a flexible, long-term savings plan designed specifically for primary school funding, secondary school funding or college funding.
If you have parents, grandparents or other adults who want to help you pay for college, Coverdell ESAs can help you set the money aside. Read on to find out if this type of savings account is right for you.
What Are the Coverdell Education Savings Accounts(ESA)?
The Coverdell ESAs are trusts or custodial accounts set up for a beneficiary, such as a college student, to pay for qualified education expenses, such as tuition. These accounts can be opened at a bank or another IRS-approved organization that offers these plans, and the amount of money in the account can grow tax-free. If you make withdrawals for approved costs related to your college degree, like tuition, books and supplies, these withdrawals are also tax-free.
There are certain limitations to Coverdell ESAs. The beneficiary must be under 18 when the savings account is set up, all contributions must be made in cash, and there is a $2,000 annual limit for contributions to the beneficiary, regardless of how many accounts are set up for that person. The amount of money for college someone can contribute to the savings account depends on their income. Also, if the beneficiary doesn’t use all the funds by age 30, these funds will be taxed as income.
What Are the Benefits of a Coverdell Education Savings Account (ESA)?
The greatest benefit of the Coverdell ESAs is that your money grows without being taxed and can be withdrawn tax-free for tuition and other school costs. Saving more money allows you to be less dependent on college financial aid that must be repaid, like college loans.
Also, if a beneficiary doesn’t plan to use all of their funds by age 30, that money can be rolled over to another family member to pay for college or other expenses. Because Coverdell ESAs can also be used for elementary and secondary education costs, you have more flexibility over how to use it than you would with other college savings plans. In addition to helping a family member pay for school, transferring the funds to another beneficiary helps you avoid taxes and penalty fees incurred by not using the funds by age 30.
Coverdell Education Savings Account (ESA) Tips & Tactics
- Make sure you keep track of how much college money you receive in a given year, since you will be taxed if you receive more than the $2,000 limit.
- In addition to saving money for college, pursue as many scholarships and grants as you can find, since this gift aid does not need to be repaid. Once you’ve enrolled in college, talk to your school’s financial aid office about what gift aid may be available to you. Gift aid and personal savings will help you avoid other college financial aid that has to be repaid, like college loans.
- Make sure your distributions don’t go over your education expenses for the year, or they will be subject to taxes.
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