Coverdell Education Savings Account (Coverdell ESA) is an account created as an incentive to help parents and students save for education expenses.
- Contributions are limited to $2,000 per child per year, which amounts to about $166 a month. Bit by bit, those savings can accumulate into a tidy sum.
- The chief feature of the Coverdell account is that it shelters investment growth from the tax collector. That means that savings set aside in such accounts — plus the earnings they make — are fully available for qualified school bills.
- Besides protecting earnings from taxes, Coverdell accounts offer investment flexibility, transferability, and tax-free withdrawals to cover education costs such as books, tuition, and room and board. And, they’re not just for college kids.
- Coverdell contributions must stop when the child reaches 18, and the account must be spent on schooling by the time the beneficiary reaches 30, unless the student has special needs. Otherwise, the earnings could be subject to income taxes as well as a 10% penalty.
- Unused portions of the Coverdell account may be transferred to a relative — a sibling, niece, nephew, even cousin—to keep the education savings in the family and avoid tax penalties.
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