Coverdale Educational Savings Account (ESA)

Taxpayers may deposit up to $2000 per year into an Coverdale ESA for a child under age 18, if your taxable income is less than $95,000 (single) and $190,000 (married) and disappear at $110,000 and $220,000. Parents, grandparents, other family members, friends, and a child him/herself may contribute to the child’s Coverdale ESA.  Each child may only have $2,000 contributed in their name per year.  That is, if the grandparents contribute $1,000 to a plan they set up, then the parents can only place $1,000 in a plan.  Great news, starting in 2002, you can contribute to both a 529 plan and a Coverdale ESA.

The new tax law makes the Coverdale ESA plan very attractive:

  • The earnings of a Coverdale ESA are not federally taxed as they accumulate.  Withdrawals from the account are completely federal tax-free, if the money is spent on qualified educational costs.  The contributions are made with after tax dollars.  Only cash can be invested into Coverdale ESA.
  • The choice of investments are much broader than the 529 mutual plans.  Therefore, the money has a chance to perform better than the 529.  If you are investment savy, then this plan might warrent a close evaluation.
  • Coverdale plans often cost less to manage and maintain than the 529 plans.  Therefore more of the contribution dollars are available for growth.
  • Maybe most importantly, the Coverdale ESA can be used for elementry and secondary education.  If you invest early enough, the Coverdale can help in private schools.

Some disadvantages of Coverdale ESAs:

  • Coverdale ESAs have a limit of $2,000 per year per child, and the income limits as stated above.
  • Some 529 plans are exempt from state income tax for contributions and withdrawels.  This is a big disadvantage for the Coverdale ESA, which does not receive this state tax break.
  • Contributions for the Coverdale are limited to the child’s age of 18.

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