Advantages and Disadvantages of Coverdell Education
Savings Accounts

Advantages

Withdrawals that are used to pay the beneficiary's qualified education expenses are completely income tax free at the federal level Qualified education expenses include elementary and secondary school expenses You have complete freedom to choose the investments you put in the account You can change the beneficiary without penalty if certain conditions are met You can contribute to a 529 plan and a Coverdell ESA in the same year for the same beneficiary without triggering a penalty A Coverdell ESA is considered an asset of the parent for federal financial aid purposes

Disadvantages

You can contribute a maximum of only $2,000 each year Your ability to contribute depends on your income--to make the full $2,000 contribution, single filers must have a modified adjusted gross income (MAGI) of $95,000 or less (a partial contribution is allowed if MAGI is between $95,000 and $110,000) and joint filers must have a MAGI of $190,000 or less (a partial contribution is allowed if MAGI is between $190,000 and $220,000) Contributions aren't allowed after the beneficiary reaches age 18, unless the beneficiary has special needs The account must be closed after the beneficiary reaches age 30, unless the beneficiary has special needs Withdrawals from a Coverdell ESA that are not used for the beneficiary's qualified education expenses are taxed and penalized (the earnings portion of the withdrawal is subject to a 10 percent federal penalty and is taxed at the rate of the person who receives the withdrawal)

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