Coverdell Educational Saving Account (ESA)
A Coverdell ESA allows you to contribute up to $2,000 annually per beneficiary under age 18. Contributions
are not tax-deductible, but earnings grow tax-deferred and withdrawals are completely tax-free if used for
qualified K-12 or higher education expenses.
However, Coverdell ESAs are largely obsolete due to the expanded flexibility of 529 plans:
- Low Contribution Cap: The $2,000 annual limit is too small to fund significant education
needs.
- Income Phase-Outs: Eligibility phases out between $95,000–$110,000 MAGI for single filers
and $190,000–$220,000 for married couples, barring high earners.
- Forfeiture Age: All funds must be fully distributed by the beneficiary’s 30th birthday, subjecting
residual balances to income taxes and a 10% penalty unless rolled over to a qualifying family
member’s ESA.
For comprehensive rules, refer to IRS Pub. 970, “Tax Benefits for Education”.