A Coverdell Education Savings Account (ESA) (formerly called an Education IRA) is a tax-advantaged account designated for education expenses, similar to a 529 plan but with lower contribution limits and income restrictions.
Contribution limits: - $2,000 per year per beneficiary from all sources combined. - Contributions are not deductible. - Phase-out for contributors: $95,000–$110,000 (single) / $190,000–$220,000 (MAGI).
Tax treatment: - Growth is tax-deferred. - Qualified withdrawals are tax-free.
Qualified expenses: K-12 expenses AND higher education (broader than 529). Includes tuition, books, uniforms, tutoring, computer equipment.
Beneficiary rules: - Must be under age 18 when contribution is made (except for special needs). - Unused funds must be distributed by age 30 (or rolled over to another family member under 30).
Coverdell vs. 529:
| Feature | Coverdell ESA | 529 Plan | |---|---|---| | Annual limit | $2,000 | No federal limit | | Income limit | Yes ($95K–$110K single) | No | | K-12 expenses | Yes (all) | $10,000/year limit | | Investment options | Any (like an IRA) | State-sponsored options | | Age limit | Must contribute before 18 | None |
> Exam tip: The Coverdell's $2,000 limit is its biggest drawback vs. 529. However, it allows full K-12 qualified expenses and broader investment flexibility. Know the income phase-out ranges for the CFP® and Series 65.