The “Education IRA”

The Coverdell ESA, also known as the education IRA, was created in 1998 to encourage parents to save for future education expenses (elementary, secondary or college), such as tuition, books, uniform, etc.  Anyone who has an adjusted gross income that falls within the government limits may contribute a maximum of $2,000 per year into an account that is established for the benefit of (“FBO”) the child. The AGI phase-out for single parents is $95,000 to $110,000 and it is $190,000 to $220,000 for married parents.

The Differences

Coverdell ESAs are much the same as that of 529 plans with a few important differences. Like a 529 plan, Coverdell ESAs allow money to grow tax deferred and proceeds to be withdrawn tax free for qualified education expenses at a qualified institution. However the definition of qualified expenses in an ESA includes primary and secondary school, not just college and university. The money must also be used by the beneficiary’s thirtieth birthday or it must be distributed and subject to ordinary income tax and a 10% penalty on the earnings. The same restrictions also apply to any non-education related withdrawals made before the beneficiary’s thirtieth birthday.