The landscape · Education
Coverdell education savings accounts
A Coverdell account holds after tax contributions for a child's education, grows tax free, and pays out tax free for elementary, secondary, or college costs.
Who this exists for. This exists for a family saving for a child's schooling, from kindergarten through college, with modest yearly amounts. Ticks that show it: I have children under 17; I support a dependent (a child in college, a parent, another adult); I or a dependent is in college or training.
How it works
Contributions are capped at this year's official coverdell contribution limit (not yet verified here; see the official source below) per child per year from all sources combined, and the ability to contribute phases out between this year's official coverdell phaseout single start (not yet verified here; see the official source below) and this year's official coverdell phaseout single end (not yet verified here; see the official source below) of modified adjusted gross income for single filers, with doubled lines for joint filers. Contributions must stop when the child turns 18 unless the child has special needs. Qualified expenses include tuition, books, supplies, tutoring, uniforms, and computers for elementary and secondary school, as well as college costs, which is wider than a 529 for the younger years. The account can hold almost any investment the custodian offers. The balance must be used or moved to a family member by the time the beneficiary turns 30, or earnings become taxable with a 10 percent addition.
What it gives
It covers elementary and secondary expenses beyond tuition, including books, tutoring, and a computer.
The investment menu is wide open, unlike many 529 plans.
The beneficiary can be changed to a family member under 30 without tax.
What it costs, or where the catch is
The yearly contribution cap is small.
Higher income families are phased out of contributing, though a grandparent or the child can contribute instead.
The age 18 contribution deadline and age 30 spending deadline are strict.
A worked example
Petra contributes the yearly cap to a Coverdell for her son starting at birth. If the cap were $2,000 a year, after 12 years she has put in $24,000, which is 12 times $2,000, and at 6 percent the account holds about $34,000. When he enters a private middle school, she pulls $3,500 a year for tuition and a $900 laptop, all tax free, which a 529 could not cover for the laptop at that grade level.
Where it goes wrong
The common miss is contributions from two grandparents and a parent that together pass the per child cap, which the custodian cannot see across accounts.
Who confirms it for you
For your own numbers, a CPA or enrolled agent. This page explains how the rule works for people in general; it does not know your situation and does not tell you what to do.
The official source
IRS Tax Topic 310, Coverdell education savings accounts. Every figure that changes by year comes from the site's rules table, which the watcher checks against the official page on a schedule; where a figure is not yet verified, this page says so instead of printing a number.
Ask about Coverdell education savings accounts
A model reads this page and answers from it. It will say when the answer is not on the page. Education, not personalized advice.
Nearby doors
- The dependent care FSA
This exists for a working parent, or a worker who cares for a dependent who cannot care for themselves, whose employer offers a dependent care flexible spending account.
- Group life and disability insurance through work
This exists for a worker whose employer offers group term life insurance and short or long term disability coverage as benefits.
- The early withdrawal penalty and its exceptions
This applies when a person under 59 and a half takes money out of an IRA, since the withdrawal is taxed and usually carries a 10 percent addition unless one of the listed exceptions fits.
- Hiring a spouse or child in the business
This exists for a business owner whose spouse or child does real work for the business, which the law treats as employment with some payroll tax differences for family.
- The child tax credit and its phase out
This exists for a parent or guardian who claims a child under 17 as a dependent.
- The additional child tax credit, the refundable part
This exists for a working parent whose child tax credit is larger than the income tax they owe.
Education, not advice. Wealthy Habitat explains how rules work and never recommends what to do with your money. The No Advice Disclosure.