Educational Savings Accounts

The Coverdell Educational Savings Account (ESA) allows you to set up an account to help save for your children’s (or other beneficiary's) educational expenses.  These accounts can be set up for anyone under the age of 18 and the funds saved in an ESA can be used for elementary, secondary or post-secondary education expenses.

The ESA allows you to make annual after-tax contributions to a specially-designated investment account for a designated beneficiary. Although the contributions are non-deductible, the account grows free of federal income taxes and qualified withdrawals are tax-free.

Funds saved in an ESA can be invested in a Savings Share, an ESA MoneyBuilder or Certificates, and it’s easy to save using Direct Deposit.

Account Ownership
Coverdell accounts may be owned by the student or the student's parent.  These accounts are treated as an asset of the account owner and the financial aid impact varies depending on who the account owner is.  If the account owner is the student, this has a high impact on financial aid eligibility.  If the account owner is the parent, this has a lower impact on financial aid eligibility.

Contribution Amount
Maximum of $2,000 per beneficiary from all sources per year.  Contributions must be in the form of cash.  Contributions of stocks, bonds, and other savings vehicles are not permitted.  (There is an exception for contributions resulting from a rollover.)  Contributions are phased out for incomes between $95,000 and $110,000 (single filers) or $190,000 and $220,000 (married filing jointly).  Corporations, including tax-exempt organizations, may contribute to an individual's Coverdell account, regardless of income level.

Contribution Age Limit
Contributions may be made until the beneficiary reaches age 18.  There are no age limits for special needs beneficiaries.

Withdrawal Age Limit
The money in a Coverdell account must be used by the time the beneficiary reaches age 30 or the earnings will be taxed as ordinary income plus a 10% penalty.  Coverdell accounts may be rolled over to another Coverdell account of a family member if the funds will not be used for qualified expenses by age 30 or upon the death of the beneficiary. There are no age limits for special needs beneficiaries.   

Qualified Expenses
Primary, secondary, and post-secondary education expenses are qualified expenses, including tuition, fees, tutoring, books, supplies, related equipment, room and board, uniforms, transportation and computers.

Income Tax Considerations
Contributions are not deductible on federal or state income tax, but earnings accumulate tax-free.  Qualified distributions are exempt from federal income tax.  Contributions may be made until the due date of the contributor's tax return (normally April 15 of the following year).  Non-qualified withdrawals may be taxed to the beneficiary as ordinary income and are subject to a 10% penalty.  (Non-qualified distributions remain tax-free in cases of death or disability of the beneficiary.)  Family First FCU does not offer tax advice.  For answers to your tax questions, please consult a qualified tax professional.

Coordination with Section 529 Plans
You can contribute to both a Coverdell account and a section 529 plan in the same year, but there may be gift tax implications if you give more than $13,000 per beneficiary per year.

Coordination with Education Tax Credits
You can claim a Hope Scholarship and/or Lifetime Learning tax credit in the same year as you withdraw funds from a Coverdell account, so long as the credits are claimed using different qualified education expenses.  You can't use the same expenses to justify two different programs.

ESA Coverdell Application Packet

ESA Coverdell Transfer and Rollover Packet

Savings Calculators