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Coverdell Education Savings Account

The Coverdell Education Savings Account is a savings plan for children under 18 that allows for tax-free growth on deposits of up to $2,000 annually, named after Senator Paul Coverdell.


 

by Kavitha

Updated Apr 08, 2024

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Coverdell Education Savings Account

Coverdell Education Savings Account (ESA)

Coverdell Education Savings is an excellent savings plan for schoolchildren under 18. It is named after Senator Paul Coverdell. You can deposit up to $2,000 per year, but you can't get a tax break for that. This money grows without any taxes for educational purposes.

You can use this money for school and college purposes without needing to pay taxes. You can use this money from kindergarten to college, but if you don’t use it until you turn 30, you might have to pay some extra fees for maintenance. To put it simply, it is the best saving method for school- and college-going kids. 

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Requirements to Create a Coverdell Education Savings Account

The following criteria are the requirements to create a Coverdell Education Savings Account:

  • Age: The beneficiary must be under 18 while starting the account.
  • Account Designation: The account should be designated specially as a Coverdell ESA to make sure that it is created for educational purposes only.
  • Written Documentation: The document establishing and governing the account must be in writing and meet certain requirements. 
  • Contributions: The contribution must be done with cash only, and this contribution is based on corporations and trusts.
  • Contribution Limits: There is no limit to the number of Coverdell ESAs that can be created for a particular beneficiary. But the total amount should not exceed more than $2,000.
  • Distributions: Distributions from the Coverdell ESA can be made tax-free to pay for qualified education expenses. If the amount is not withdrawn after the age of 30, then you have to pay some additional maintenance fees. 
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Advantages of the Coverdell Education Savings Account

Tax-Free Growth: Without paying any tax, the principal amount grows faster.

Flexible Spending: This savings is only for savings, and it has no constraints over any educational purpose.

More Investment Choices: You can pick from different types of investments like stocks, bonds, and real estate.

Potential for Higher Returns: It has a higher potential return compared to other accounts.

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Disadvantages of the Coverdell Education Savings Account

Low Contribution Limits: Up to $2,000 can be deposited per year by the beneficiary. It might not be enough for the educational expenses.

Income Restrictions: If you make too much money, you might not be allowed to deposit it into the account.

Age Limit for Contributions: Without tax, you can only have the money until the kid turns 18; after that, you need to pay penalties.

No State Tax Benefits: You won’t get any extra tax benefits from your state, unlike some other accounts.

Coverdell Education Savings Account - FAQs

1. What is a Coverdell Education Savings Account (ESA)?

A savings plan for kids under 18 to cover educational expenses.
 

2. What are the requirements to create a Coverdell ESA?

Beneficiary under 18, account designated as a Coverdell ESA, written documentation, cash contributions, and certain limits apply.
 

3. What are the advantages of a Coverdell ESA?

Tax-free growth, flexible spending, more investment choices, and potential for higher returns.
 

4. What are the disadvantages of a Coverdell ESA?  

Low contribution limits, income restrictions, age limit for contributions, and no state tax benefits.

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