Coverdell Education Savings Accounts

Looking for a College Saving Investement option that has no Investment Restrictions?

Formerly known as Education IRAs, The Coverdell Education Savings Accounts, ESA, is another tax-advantaged way to pay for college. Unlike 529 plans, your investment options are virtually limitless - except for investing in life insurance contracts. You can buy and sell what you want whenever you want. They can be set them up at almost any brokerage firm, mutual-fund company, or other financial institution.

Federal Tax Advantages

Earnings in Coverdell Education Savings Accounts are tax-deferred and withdrawals that are used for qualified education expenses are tax-free.

Education Expenses Covered

One advantage that ESAs have over other tax-advantaged saving options is that you can make tax-free withdrawals to pay for private elementary and high school expenses, as well as post-secondary school expenses. If private school is in the future, one option you might want to consider is saving for that expense in an ESA and using a 529 plan for college.

Contribution Limits

ESAs have two annual contribution limits for individuals:

    1. You can give up to $2,000 to any one beneficiary assuming you meet the ESA income limits discussed below.

    2. The total of all contributions to all ESAs set up for one beneficiary cannot exceed $2,000. If other family members set up ESAs for your child, you need to check with them to make sure this contribution limit is not exceeded.

If you exceed these contribution limits, there is a 6% excise tax on excess contributions unless the excess amount is withdrawn within six months of the contribution.

Invest $2,000 a year at an annual yield of 6% from the time your child is born, and you will have a little over $61,000 in college savings when your child turns 18.

Income Restrictions

A couple filing a joint return can contribute $2,000 if their modified adjusted gross income is less than $190,000 a year. The ability to contribute is phased out for couples filing jointly with modified adjusted gross incomes of between $190,000 and $220,000. Contributions are not allowed for couples filing jointly whose modified adjusted gross income is above $220,000.

Single taxpayers will be able to contribute $2,000 if their modified adjusted gross income is less than $95,000. Single taxpayers' ability to contribute is phased out if their modified adjusted gross income is between $95,000 and $110,000. No contributions are allowed if their modified adjusted gross income is above $110,000.

Fees, Charges and Expenses

Fees, charges and expenses will vary depending on the investments you choose and the institution with which you open the account. Please remember because of the fairly low contribution limits, even small annual fees or expenses could make a big difference in the value of your investment over time.