When it comes to saving up for your child’s school and college expenses, you may want to consider a Coverdell ESA. They can be a great option if you want more investment choices when it comes to education savings. Here’s what you need to know about them, how they play into financial aid, and how they compare to 529 plans.

What is a Coverdell ESA?

 A Coverdell Education Savings Accounts, or Coverdell ESA, is an account that is opened by an individual to help save for another’s K-12 and college expenses. Usually opened by parents or grandparents, they need to be created before the beneficiary reaches 18. In order to qualify for one of these plans, the adjusted gross income needs to be less than $110,000 for a single filer or less than $220,000 for two people.

The money in these accounts can then be invested into individual stocks and take advantage of other investment opportunities.

How Can Coverdell ESA Funds Be Used?

These funds can be used for any level of education. This means it can cover tuition at a K-12 school, college, or other type of institution. It can also be used for tutoring, room and board, transportation, extracurriculars, and other school related expenses.

The funds in the Coverdell ESA need to be used by the time the individual turns 30 years old – the exception being if the beneficiary has special needs. If the amount isn’t spent by this time, it can result in taxes and penalties.

How Does it Compare to a 529 Plan?

When it comes to a child’s education, you may be torn between a Coverdell ESA and a 529 plan. There are a few differences you’ll need to note.

Is a Coverdell ESA Right for You?

There are definitely differences between the Coverdell Education Savings Accounts and 529 plans that are worth noting. The good thing if you’re not sure which to go with? You can go with both. They can absolutely work together. Understanding how each one works though will help ensure you’re making the best choices for your finances and your child’s financial and educational future.