The Coverdell Education Savings Account is a tax-advantaged savings account created to help fund qualified education expenses. This benefit applies not only to qualified elementary and secondary education expenses but also to qualified higher education expenses. Contributions are non-deductible, earnings are tax-deferred and distributions are tax free if used to pay for the account beneficiary’s qualified educational expenses.
Contribution Limits
Anyone — whether related to the account beneficiary or not — may contribute toward the combined maximum of $2,000 to a child’s Coverdell Savings Account, depending on their Modified Adjusted Gross Income. Contributing to a Coverdell Education Savings Account does not affect your ability to contribute to a Roth or T-IRA. Rollovers from a Roth or T-IRA are not allowed. A Coverdell Savings Account must have one responsible individual, a parent or legal guardian of the child/beneficiary, to oversee the account. This person decides when funds will be withdrawn and if and when funds will be rolled over to the Coverdell Savings Account of another family member.
Key Features of Coverdell Education Savings Accounts
- Contributions are non-deductible
- Qualified distributions are tax-free
- Contributions must stop at beneficiary’s 18th birthday unless they are a special needs child
- Funds must be disbursed or rolled over by beneficiary’s 30th birthday unless they are a special needs child
Withdrawals
Distributions may be made at any time, tax and penalty free as long as funds are used to pay for qualified education expenses for the account’s designated beneficiary. Non-qualified distributions may be taxable and subject to an IRS penalty.
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