Coverdell ESA – Advantages and Disadvantages

From the renaming of Education IRA to Coverdell Education Savings Account (ESA) in 2002, they are considered as a very attractive investment option. Most people compare Coverdell ESAs with 529 plan. Coverdell ESA holds many advantages and limitations.

Advantages of Coverdell ESA

1. It helps parents to set up a savings account for their children’s educational expenses. This also can include certain elementary and secondary school expenses.
2. The withdrawals are tax free for qualified expenses. Many K-12 expenses are included in qualified expenses.
3. Withdrawals are not reported as parent or student income if it is tax-free.
4. The annual contribution limit was raised to $2000 from $500 in 2002.
5. Accounts can be transferred to relatives.

Limitations of Coverdell ESA

1. There is both age and contribution limits. Annual contribution limit is $2000, contributions cannot be done after the child reaches age 18 and withdrawals are susceptible for tax and penalties once the beneficiary reaches age 30.
2. The financial firms handling ESAs charge maintenance fees, which can significantly reduce the return, because of the low annual contribution limit.
3. The parents lack some degree of control over ESA accounts, because the savings cannot be refund back to the parents’ account. It is distributed to the child.
4. Many benefits associated with Coverdell ESA may expire after 2010, unless congress extends those.

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