Waddell & Reed

Coverdell ESA

About Coverdell Education Savings Accounts (CESA)

A Coverdell Education Savings Account allows you to make an annual non-deductible contribution to a specially designated investment trust account. The account grows federal income tax free and withdrawals are taxfree. Coverdell funds can be used for college expenses as well as K-12 expenses.

Coverdell At A Glance

Maximum Investment $2,000 per year per beneficiary.
Qualified Expenses K-12 and college expenses such as tuition, fees, books, supplies, equipment, limited room and board.
Account Control Responsible Individual on behalf of the beneficiary.
Tax Advantages
  • Earnings grow federal and state income tax deferred.
  • Withdrawals are federal tax-free when used for
    qualified expenses.
Estate and Gift Tax Advantages Contributions qualify for the $13,000 ($26,00 for married couples) gift tax exclusion.
Income Restriction Contributors must have less than $95,000 ($190,000 for married couples) in modified adjusted gross income to qualify for full $2,000 contribution.
Tax Credit Affected Yes. See your tax advisor.
Withdrawal Penalty Earnings on non-qualified withdrawals taxed at owner's rate plus a 10 percent penalty.

Coverdell Benefits and Considerations

  • Invest $2,000 Annually
    Invest up to $2,000 per year per child, up to age 18, to save for educational expenses. Be careful to monitor total contributions per child if multiple family members are contributing. If total contributions exceed $2,000, a penalty will apply.
  • Other Family Members May Contribute
    Grandparents and other family members can set up a Coverdell account in your child's name.
  • May Be Used For K-12 Expenses
    The funds may be used to cover costs associated with attending elementary or secondary school, whether public, private or religious.
  • Age Limitations
    The beneficiary of a Coverdell must be younger than 18 at the time of the contribution. The account must be fully withdrawn by the time the beneficiary turns 30.
  • Account Control
    A Coverdell account eventually will be distributed to the beneficiary – it cannot be refunded back to whomever established the account. The Responsible Individual may, however, change the beneficiary of the account provided restrictions were not put in place when the account was established.
  • Coverdell and Financial Aid
    When applying for financial aid, the assets in a Coverdell account are considered an asset of the account custodian. Withdrawals are not reported as student or parent income as long as they are used for qualified expenses.

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