Coverdell, also known as a Coverdell Education Savings Account (ESA), is a specialized investment account created by the U.S. federal government to assist individuals in saving for education-related expenses. The Coverdell program was established in 1997 and is named after its primary legislative sponsor, former U.S. Senator Paul Coverdell.
A Coverdell account allows parents, guardians, or individuals to contribute funds that can be used for qualified education expenses incurred by a designated beneficiary. These beneficiaries are typically children under the age of 18, or individuals with special needs. Contributions to a Coverdell account are not tax-deductible, but the earnings accumulate tax-free. Additionally, withdrawals from the account are also tax-free, provided they are used for qualified education expenses such as tuition, books, supplies, and certain educational services.
Unlike other education savings options, such as 529 plans, Coverdell accounts offer more flexibility in terms of the eligible educational institutions which include K-12 public, private, or religious schools. However, there is a maximum annual contribution limit per beneficiary and contributions must cease when the designated beneficiary turns 18 (unless they have special needs).
Coverdell accounts are often utilized by families and individuals seeking to save for educational expenses in a tax-advantaged manner. By offering tax-free growth and withdrawals, these accounts aim to encourage long-term education savings and alleviate the financial burden associated with educational pursuits.
