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  • If distributions exceed educational expenses, the additional amount withdrawn is a nonqualified distribution.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.

Who should consider a Coverdell Education Savings Account?

Although each situation is unique, in general, a Coverdell Education Savings Account may meet your needs if:

  • You are eligible and wish to invest for higher education expenses using a tax-advantaged vehicle.
  • You are a single individual with a modified adjusted gross income (MAGI) of less than $110,000 or married filing jointly with a MAGI of less than $220,000.
    • Reduced contributions are allowed for taxpayers with MAGI over these amounts.

Lincoln Investment Icon Lincoln Investment Can Help

We can provide valuable assistance in making the investments that will help you have the cash for higher education expenses when you need it. Contact a Lincoln Investment financial advisor to discuss all of the education investment options available to you, including the Coverdell Education Savings Account.