Tax Guide

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Coverdell Education Savings Accounts

The Coverdell Education Savings Account lets you set aside up to $2,000 per year for the beneficiary and can be used tax-free not only for college, but for K-12 expenses as well. The student beneficiary must be under age 18 when the account is created. 

There are some limitations, however.

Each ESA has a custodian – usually the financial institution where the account is located. The individual opening the account can make decisions on contributions and distributions, but distributions are always paid to the student beneficiary. And if any money is left in the account when the student reaches 30, the balance must be paid out at that time. That balance is taxable, and if no qualified education expense was incurred that year, is assessed an additional 10 percent penalty on the interest accrued.

The bottom line: Spend all the funds in the Coverdell ESA before the student reaches age 30.

A Coverdell ESA is considered a parent’s asset by the financial aid system, just like a 529 savings plan. But where you may get a state tax deduction for a 529 plan, it’s unlikely you’ll see any state tax breaks for an ESA.

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