A Coverdell Education Savings Account (ESA) is a tax-advantaged trust or custodial account designed to help pay for qualified education expenses from kindergarten through college. Unlike 529 plans (which originally focused on higher education), Coverdell ESAs have always covered K-12 expenses.
10 steps across 1 sections
1. Steps Process
- Verify income eligibility. Contribution limits are based on the contributor's Modified Adjusted Gross Income (MAGI):
- Full $2,000 contribution: MAGI under $95,000 (single) or $190,000 (married filing jointly)
- Reduced contribution: MAGI between $95,000-$110,000 (single) or $190,000-$220,000 (joint)
- No contribution allowed: MAGI above $110,000 (single) or $220,000 (joint)
- Workaround: Corporations and trusts can contribute regardless of income, and there is no restriction on who funds the account
- Choose a financial institution. Open a Coverdell ESA at a bank, brokerage firm, or mutual fund company that offers these accounts. Options include Schwab, Fidelity, TD Ameritrade, and others.
- Open the account. You will need:
- The beneficiary's name, date of birth, and Social Security number
- The beneficiary must be under 18 at the time the account is opened (exception: beneficiaries with special needs)
- Proof of identity for the account owner
Common Mistakes
- Exceeding the $2,000 annual limit
- Not using funds by age 30
- Ignoring income limits
- Confusing contribution and tax year deadlines
- Not coordinating with 529 plans
Pro Tips
- Use Coverdell ESAs for K-12 expenses
- Maximize investment flexibility
- Combine with a 529 plan
- Start early to maximize growth
- Consider the income limit workaround