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Coverdell Education Savings Accounts

Formerly known as the Education IRA, Coverdell Education Savings Accounts (Coverdell ESAs) allow investors to contribute up to $2,000 annually per beneficiary to a specially designated investment trust account. The designated beneficiary must be a child under the age of 18, and contributions must be ceased when the beneficiary attains age 18. While contributions are non-deductible, any account growth is free from federal income taxes and account withdrawals for qualified education expenses are tax-free as well. The account must be fully withdrawn by the time the beneficiary reaches age 30, or else it may be subject to tax and penalties. Certain additional requirements must be met in the years that contributions and withdrawals are made.

Coverdell ESAs offer several benefits for investors seeking to fund education-related expenses:
  • Contributions may be made by anyone meeting the filing status and Adjusted Gross Income (AGI) requirements - even the beneficiary him/herself. Corporations or other entities may also contribute, in which case AGI limits do not apply.
  • While the beneficiary is a minor, control of the account must be designated to a "responsible person" who will be charged with making investment decisions and authorizing distributions.
  • Depending on the account custodian's plan document, the responsible person may retain control of the account after the beneficiary attains the age of majority, the beneficiary may take control, or the plan may offer a choice of these two options at the time the account is established.
  • Contributions are not tax deductible for the contributor but distributions, including account earnings, are generally tax free if used to pay qualified education expenses for the designated beneficiary.1
  • Qualified education expenses for Coverdell ESAs include qualified elementary and secondary school expenses as well as post-secondary education expenses.2
  • The excise tax prohibiting contributions in both a Coverdell ESA and a §529 plan was repealed for 2002 and thereafter, allowing an investor to fully fund a Coverdell ESA each year and direct additional savings to a §529 for the same beneficiary.
  • Contributions to §529 plans are considered to be qualified education expenses that can be paid from a Coverdell ESA. Therefore, you can roll Coverdell assets into a §529 account without tax consequences.

See Legend's Comparison of Investments for College Savings for further details.

Your Legend Advisor can help you determine if a Coverdell ESA suits your needs. He or she can also assist you with account setup and investment selection, and help ensure your portfolio remains on track to achieve your goals.

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1Even when used for qualified education expenses, a portion of an ESA withdrawal may be taxable if a Hope or Lifetime Learning credit is claimed or a deduction for tuition payments is taken.

2Unless Congress acts to repeal the sunset on this provision, elementary and secondary school expenses will no longer be qualified after 12/31/2010.

Legend Equities Corporation and its affiliates do not provide tax information or advice.