The Coverdell Education Savings Account

How can a Coverdell Education Savings Account help you save for higher education?

A Coverdell Education Savings Account (formerly known as an Education IRA) is a tax-advantaged way to save for higher education expenses.

  • You may make annual nondeductible contributions to a Coverdell Education Savings Account of up to $2,000 per child, per year.
    • Unlike an IRA, you cannot take a tax deduction for any of the contributions that you make to a Coverdell Education Savings Account.
  • When the child is ready to make withdrawals for qualified education expenses, no taxes are due on any of the earnings in the Coverdell Education Savings Account.
  • The funds in a Coverdell Education Savings Account can only be used for qualified education expenses, meaning tuition, fees, books, supplies and equipment required for enrollment or attendance at an eligible educational institution.
    • Eligible institutions include primary and secondary schools, colleges, universities and vocational schools.
  • The child has to be under the age of 18 while you are making contributions and must complete the distributions by age 30.
    • The age limitation does not apply to children with special needs.
    • The child does not have to be your child.
    • You can make annual contributions to Coverdell Education Savings Accounts for as many children as you desire.
  • Distributions must be made during the year in which the educational expense occurred.
  • If distributions exceed educational expenses, the additional amount withdrawn is a nonqualified distribution.
    • This nonqualified distribution becomes a ratio of contributions and earnings.
    • The earnings portion is subject to taxes and a 10 percent penalty.
  • Your contributions to a Coverdell Education Savings Account do not impact your contribution limit for any type of IRA.
  • You cannot move funds from a Roth or traditional IRA into a Coverdell Education Savings Account.
    • You can roll funds from one Coverdell Education Savings Account into a second Coverdell Education Savings Account established for the same child.
  • You can roll a Coverdell Education Savings Account into a Coverdell Education Savings Account for a new designated beneficiary who is a member of the same family.
    • If a child decides not to pursue higher education, the account can then be transferred to a relative who does.