Educational Savings

What Is Coverdell Education Savings Account (ESA)?
A Coverdell Education Savings Account is a tax-deferred trust account created by the U.S. government to assist families in funding educational expenses for beneficiaries who must be 18 years old or younger when the account is established. The age restriction may be waived for special needs beneficiaries. An ESA can be established with a minimum deposit of $500 dollars or an $200 initial deposit with a monthly EFT (Electronic Funds Transfer) of $25. While more than one ESA can be set up for a single beneficiary, the total maximum contribution per year for any single beneficiary is $2,000.

How a Coverdell Education Savings Account (ESA) works is that the ESA allows families to increase investment earnings through tax-deferral if the funds are used for educational purposes.

For example, if you contributed $500 to an ESA annually and it appreciated to $5,000 in 10 years, the earnings would not be taxed until the account’s owner was enrolled in a post-secondary institution.

  • Coverdell funds can be used to pay a wide variety of expenses for young people (grades K-12 and through higher education) attending eligible schools.
  • Coverdell funds must be used by the time a student is age 30 or taxes, fees, and penalties will accompany withdrawals.
  • The cut-off amount for contributions to a Coverdell Education Saving Account is $2,000 a year.

When the contributions are distributed, they are tax-free assuming they are less than the account holder’s annual adjusted qualified education expenses, including tuition, books, equipment, special needs services, and even academic tutoring. ESA account funds can be used for primary and secondary schools (grades K-12) as well as higher education.

** Luso-American Financial or its agents do not offer tax advice, please consult your tax advisor for information specific to your situation. **