The Coverdell ESA Plan is an excellent option for family members who are looking for ways to save for a child’s college education. It works as a long-term investment, where you put some money away every year towards your designated beneficiary’s education.
Benefits of the Coverdell ESA Plan
The Coverdell ESA (Education Savings Account) Plan is a special type of tax-deferred college savings account introduced by the federal government to help individuals fund the educational expenses of a designated beneficiary who is 18 years old or younger. The beneficiary does not necessarily have to be related to the account holder.
The biggest benefits of the Coverdell ESA Plan are that it allows for tax-deferred growth of the asset and it also allows for tax-free distribution for qualified expenses towards all educational costs, including elementary, middle, high school, and college costs.
Restrictions to the Coverdell ESA Plan
There are two restrictions to this plan.
- Money can be deposited into a designated beneficiary’s account only up until their 18th birthday.
- While each child is allowed to have multiple Coverdell accounts set up by different beneficiaries, they can only receive a total maximum annual contribution of $2,000 in all of their accounts.
What Happens to Unused Funds
If the beneficiary attends a lower-cost college or decides against going to college, the unused funds must be distributed to them within 30 days after they turn 30 or the funds must be transferred into another Coverdell ESA for someone who is less than 30 years of age.
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