More Than Just College Tuition: Save for Education With a Coverdell ESA
June 20, 2011

NEW YORK, NY - (Jun 20, 2011) - Most people associate the concept of saving for education with the high cost of college tuition -- and many choose to save by investing in a 529 plan. Although 529 plans are a useful tool for college savings, American families could also benefit from investing in a Coverdell Education Savings Account (ESA), which helps pay for costs related to elementary and secondary education, according to financial experts at Firstrade,, a leading online brokerage.

According to a report released by the U.S. Department of Agriculture on June 13, 2011, the cost of raising a child from birth (in 2010) to age 18 has increased to over $285,000 (accounting for estimated inflation). Education represents 17 percent of child-rearing expenses and is the second-fastest growing cost behind healthcare, the report shows.

A Coverdell ESA, formerly known as an Education IRA, allows investors to save up to $2,000 per child per year to help pay for the cost of elementary, high school, or higher education for each designated beneficiary. Qualified expenses for elementary and high school include books, tutoring, uniforms, extended care programs and even internet access.

"As the cost of educating a child increases and as more school districts pass along extracurricular fees to families, having an investment-based, tax-free source of income for these expenses becomes more important," said John Liu, President and CEO of Firstrade. "The greatest benefit of having a Firstrade ESA versus a typical CD or savings account is that the investment can be managed directly by the account holder, and the return on investment can be far greater as a result."

Following are some basic rules regarding contributions to a Coverdell ESA:

  • Contributions of up to $2,000 in total can be made per child/beneficiary under the age of 18, regardless of the number of established accounts.
  • Contributions are non-deductible, but accounts grow tax-free and up to $2,000 per year can be withdrawn tax-free if used for qualified expenses for each beneficiary.
  • Accounts are limited to individuals or families whose modified adjusted gross income (MAGI) is less than $110,000 (or $220,000 if filing a joint return).
  • There is no limit to the number of ESAs that can be established for one child as long as the total contributions do not exceed $2,000 per year/per beneficiary.
  • If more then $2,000 is contributed in total, then the excess is subject to a 6-percent excise tax penalty.
  • Only cash can be contributed to a Coverdell ESA and the contributions must stop after the individual turns 18, unless he/she is a special needs beneficiary.
  • The deadline to open and fund a Coverdell ESA is April 15th for any tax year.

A Coverdell ESA can be used to pay for the following qualified expenses:

Higher Education:

  • Tuition and fees
  • Books, supplies, and equipment
  • Expenses for special needs services
  • Expenses for room and board by students who are enrolled at least part-time

Qualified Elementary and Secondary Education Expenses:

  • Tuition and fees
  • Books, supplies, and equipment
  • Academic tutoring
  • Special needs services beneficiary
  • Room and board
  • Uniforms
  • Transportation
  • Supplementary items and services (including extended day programs)
  • Computer technology, equipment, Internet access and related services