Retirement and College Savings Plans - Coverdell Education Savings Plan
Coverdell Education Savings Account (ESA)
The Coverdell ESA, also known as the education IRA, was created in 1998 to give parents a tax-advantaged account in which they could save money for a child's college education. Anyone who has an adjusted gross income that falls within the government limits may contribute a maximum of $2,000 per year into an account that is established for the benefit of ("FBO") the child. The AGI phase-out for single parents is $95,000 to $110,000 and it is $190,000 to $220,000 for married parents.
While contributions are not tax deductible, the money within the Coverdell ESA grows tax-deferred and is tax-free if used for qualified educational expenses at an institution of higher education, including tuition, room and board, and other related costs. The money must be used by the beneficiary's 30th birthday or it must be distributed and subject to ordinary income tax and a 10% penalty on the earnings. The same restrictions also apply to any non-education-related withdrawals made before the beneficiary's 30th birthday.
With the increasing costs of education, these instruments have become increasingly popular with parents. Learn more about these accounts within the tutorial Education Savings Accounts.