Coverdell ESA: Tax-Advantaged Savings for Education

The Coverdell ESA is also sometimes referred to as an educational IRA. The Coverdell ESA is similar to an IRA because it lets you save money in a tax-advantaged account. The biggest difference is that the savings purpose are for education expenses. Here are a few things to consider about the Coverdell ESA.

How They Work

The Coverdell ESA is designed for parents that want to save money for their child's education expenses. You set up an account with a financial institution and begin your contributions. You can put as much as $2000 per year into the account. The account is funded with after-tax money. The money is then placed into different investments, just like you had money in an IRA. 

From there, the money is allowed to grow tax-free over the years. When your child is ready for college, you can then withdraw the money without paying taxes on it. This setup makes it very similar to a Roth IRA for retirement, except you are using it for education expenses. 

Other Considerations

When dealing with a Coverdell ESA, you will be transferring ownership of the money over to your child once they are ready for school. They also have to use the money for education expenses by the time they reach the age of 30 or face taxes and penalties.