What does the Peace Corps, the US Senate, and the tax code have to do with education funding? They’re all related to Senator William Coverdell! Senator Coverdell represented Georgia from 1993 to 2000 after serving as the director of the Peace Corps. In 1997, Senator Coverdell sponsored the legislation that created the educational savings account that now bears his name!
What is aCoverdell ESA? Formerly known as an Education IRA, a Coverdell ESA is a tax-deferred trust account created by the US government to assist families seeking to fund educational expenses. You can establish a Coverdell for the benefit of the student of any age, so long as they’re younger than 18. Anyone can contribute to a Coverdell ESA for the benefit of the student, including friends and extended family. The account limits contributions to $2,000 per year per person.
What are the potential benefits? Withdrawals are tax- and penalty-free if used to cover qualified educational expenses. A qualified educational expense can include tuition, fees, and books for a child at a private elementary or secondary school or a public or private college (not a comprehensive list!). The beneficiary can use Coverdell funds penalty-free until they reach the age of 30, after which any leftover funds will be taxed at the ordinary income. Fortunately, leftover funds can be transferred to another family member to avoid the penalty.
What are the restrictions? While anyone can contribute to a Coverdell ESA for the benefit of the student, they can’t add more than $2,000 per year, and contributions aren’t tax-deductible. To be eligible to contribute to a Coverdell, your modified adjusted gross income must be less than $95,000 (single filer) or $195,000 (joint filer). You cannot contribute to a Coverdell at all if your modified adjusted gross income exceeds $110,000 (single) or $220,000 (joint).
Is a Coverdell ESA right for your education funding plan? Contact our office today to discuss all your options!
What is a Coverdell ESA?
September 22, 2021