Coverdell ESA

A Coverdell Education Savings Account (ESA) is a tax-advantaged Savings Account designed to help families save for education expenses. Contributions to a Coverdell ESA are not tax-deductible, but the earnings grow tax-free, and withdrawals are tax-free when used for qualified education expenses, which can include tuition, books, and supplies for elementary, secondary, and post-secondary education.

Annual contributions are limited to $2,000 per Beneficiary and must be made before the Beneficiary turns 18, although funds can remain in the account until the Beneficiary turns 30. The income phase-out range for contributors is between $190,000 and $220,000 for married couples filing jointly, and $95,000 to $110,000 for single filers.

For example, if a family contributes $2,000 annually to a Coverdell ESA for their child’s education from birth to age 18, assuming an average annual return of 5%, the account could grow significantly by the time the child is ready for college. This allows them to withdraw funds tax-free for qualified educational expenses.

In a case where a Beneficiary attends a private elementary school, the family can use the funds from the Coverdell ESA to pay for tuition, benefiting from the tax-free withdrawal. Alternatively, if the Beneficiary does not use all the funds by age 30, the remaining balance can be transferred to a sibling’s Coverdell ESA, maintaining the tax advantages.