Are you interested in learning more about a Coverdell Education Savings Account?
It’s important to think about your child’s future education and how you will pay for it. Whether your child wants to go to a private high school, a technical school, a four-year university, or on to grad school, you need to plan in advance to ensure you have enough money and resources to help them.
When you open a Coverdell Education Savings Account (ESA), you show your commitment to saving money responsibly for your child’s education. It’s a smart way to prepare for a common expense, no matter how far away it may seem.
Is a Coverdell ESA right for your family? How does it compare to other options, such as a 529 Savings Plan? Read on to learn more about education savings accounts.
Coverdell ESAs are investment accounts with tax benefits meant to encourage people to save for qualified educational expenses. Those costs may be at the postsecondary, secondary, or primary level. Money deposited in a Coverdell ESA is tax-deferred, and it can be taken out without incurring taxes when the money goes toward education-related needs at an eligible school.
Coverdell ESAs were originally referred to as Education Individual Retirement Accounts. In the 1990s, they were named after the late Senator Paul Coverdell, a Georgia Republican who pushed for a new way for families to pay for college. They share some similarities with IRAs — a savings account for retirement that also has tax advantages. Like the IRA, the Coverdell ESA has a maximum annual contribution and income restrictions.
Account beneficiaries must be under age 18. Anyone can open an account for a child — you do not have to be related to them. Other rules concerning Coverdell accounts include:
The accounts are similar. Both allow people to save money for a child’s education, and both offer tax advantages. But they do have a few major differences:
You can open a Coverdell at any time for any child under the age of 18. You need your beneficiary’s full name, date of birth, Social Security number and address. Contributions to the account can be made by anyone, and they do not have to be related to the beneficiary. In fact, a corporation or partnership can even contribute.
The money in a Coverdell ESA must be distributed before the beneficiary turns 30. You have until 30 days after that birthday to distribute the assets. The one exception to this rule is when the beneficiary has special needs. That is dealt with on a case-by-case basis.
You can open the ESA at a financial institution of your choosing. If a bank or investment institution offers IRAs, it will usually also offer ESAs. Many charge an annual maintenance fee, and some may require a minimum annual contribution. You should compare offerings to see which one works the best for you and your financial needs.
Are you ready to open a Coverdell ESA to save for your child’s education? You can enroll in one through PSECU. We offer Coverdell ESAs for our members, and don’t charge an annual fee or require any minimal annual contributions. Explore your options, and find more money management tips and resources on our WalletWorks page.