A Coverdell Education Savings Account is a type of Education Savings Account, ESA, that allows parents and students to save money to be used for future education costs. It can be started with a mutual fund company or a bank. The expenses of college and university are not the only educational sources covered in this plan. Elementary and secondary schools may also be included as well. Students may spend the savings on tuition and fees, room and board, books, along with other equipments that may be required by the school. Though this ESA covers the expenses of different levels of education, the benefits only qualify for eligible schools and colleges.
One of the biggest benefits of opening a Coverdell Education Savings Account is that the balance grows without being taxed. Similarly, no taxes will be charged during the time of withdrawal considering the money is contributing to expenses of a qualified educational system. Coverdell ESAs have a limit on the age of the beneficiary requiring that the student withdraw the amount in the account by the age of 30. The beneficiary is given a period of thirty days after reaching the age limit to take the money out. If the money is not spent by this age and the time allowed afterward, there will be taxes and other penalties imposed on the account. Other than disbursing the savings, this account can be switched to benefit another member of the family who is still under 30 years old. This way no taxes or penalties are issued.
Anyone can open a Coverdell Education Savings Account depending on their income. The student need not have to be related to this person. The owner of the account (the person contributing to the savings) should know that this is not tax deductible and the owner can only pay $2000 per year in total for each beneficiary. This owner may open multiple accounts but for different recipients. If other people are already putting money in a Coverdell ESA for a particular student, then a new contributor may only pay an amount that will not push the limit over the $2000 maximum. In other words, no matter how many people are adding to one ESA, in combination the overall balance for the year can not exceed the amount of $2000.
To benefit from this plan the beneficiary must be under 18 years old or qualify as a special needs beneficiary. Special needs beneficiaries are those who may be physically handicapped, have a mental disorder, or a learning disability. The student has to be enrolled in an educational institution like a college or school that is eligible to receive such pay offs. In general, the institutions must be accredited. These may include private and religious schools along with public schools. Vocational schools can be covered by a Coverdell Education Savings Account granted they have proper accreditation. This ESA will not affect the student from receiving financial aid as long as the student is not listed as the owner of the account.