Is the Coverdell ESA Right For Me?

by Johnson Raptor on November 25 2021

What plans do you have when it comes to helping your child afford their future education? The Coverdell ESA may be on your radar, but is it the right choice for you and your future college student? We’ll cover what you need to know about this savings account and how you can decide if it’s the right route for your family.

What is the Coverdell ESA?

A Coverdell Education Savings Accounts (also known as the Coverdell ESA) is an account that can be opened by someone, usually parents or grandparents, to help with saving for a child’s future K-12 and college costs, tuition, room and board, transportation, extracurriculars, and any other related expenses. Unlike a 529 plan, a Coverdell ESA can cover anything related to school – a 529 plan only covers college expenses.

The money in these accounts are then invested into individual stocks or other investment opportunities. This can be risky, but the payoff can be larger than a 529 plan.

Is the Coverdell ESA Right For You?

Determining whether or not a Coverdell ESA is right for you and your child is a must before you actually open an account. Consider these different points.

Do You Qualify?

First, you need to determine whether or not you and your child qualify. You have to meet certain criteria:

  • They have to be opened before the beneficiary is 18
  • Adjusted gross income needs to be less than $110,000 for a single filer
  • Adjusted gross income needs to be less than $220,000 for joint filers

The Accounts Have Limits

It’s also important to understand the different limits that come with the Coverdell ESA.

  • You can only contribute $2,000 a year max.
  • The amount must be used by the time the child beneficiary is 30 years old
  • There are exceptions made for those with special needs

Other Important Factors

There are other factors that could influence your decision when it comes to this type of savings account.

  • Your Coverdell ESA could impact financial aid eligibility and offers
  • You could pay taxes if you continue adding to the account after the individual has turned 18
  • With the $2,000 limits, it may not be enough to cover tuition expenses if you start too late
  • There aren’t any available tax deductions
  • You could end up with more money thanks to the investment side of the plan
  • You have flexibility when it comes to spending from this account

Deciding whether or not the Coverdell ESA is right for your family really depends on your current financial situation and goals. It’s important to go over your different options to ensure you’re making the best decision for your money. If you’re unsure which best serves you or if the Coverdell ESA is right for you, talk to a financial advisor.

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We hoped you enjoyed this article! Remember, you can and potentially lower your monthly student loan payments and save money.