What Is a Coverdell ESA?

A Coverdell ESA is a trust or custodial account created or organized in the United States only for the purpose of paying the qualified education expenses of the designated beneficiary of the account.

Generally, when the account is established, the designated beneficiary must be under age 18.

To be treated as a Coverdell ESA, the account must be designated as a Coverdell ESA when it is created.

Beginning in 2002, the designated beneficiary can be 18 or older if he or she is a special needs beneficiary.

The document creating and governing the account must be in writing and must satisfy the following requirements.

  1. The trustee or custodian must be a bank or an entity approved by the IRS.
  2. The document must provide that the trustee or custodian can only accept a contribution that meets all of the following conditions.
    1. Is in cash.
    2. Is made before the beneficiary reaches age 18 (Beginning in 2002, this does not apply if the beneficiary is a special needs beneficiary).
    3. Would not result in total contributions for 2001 (not including rollover contributions) being more than $500 ($2,000 for 2002).
  3. Money in the account cannot be invested in life insurance contracts.
  4. Money in the account cannot be combined with other property except in a common trust fund or common investment fund.
  5. The balance in the account generally must be withdrawn within 30 days after the earlier of the following events.
    1. The beneficiary reaches age 30. (Beginning in 2002, this rule no longer applies if the beneficiary is a special needs beneficiary).
    2. The beneficiary's death.

Education IRAs at a Glance

Qualified education expenses. These are expenses required for the enrollment or attendance of the designated beneficiary at an eligible educational institution. The following items are qualified education expenses.

  1. Tuition and fees.
  2. The cost of books, supplies, and equipment.
  3. Amounts contributed to a qualified state tuition program. (See chapter 8, Qualified State Tuition Programs.)
  4. In some situations, the cost of room and board.

The cost of room and board is a qualified education expense if the designated beneficiary is at least a half-time student at an eligible educational institution.

The expense for room and board is limited to one of the following two amounts.

  1. The school's posted room and board charge for students living on campus.
  2. $2,500 each year for students living off campus and not at home.

Beginning in 2002, you can also use withdrawals from a Coverdell ESA account for certain elementary and secondary education expenses. For an explanation of elementary and secondary education expenses for which a withdrawal from a Coverdell ESA can be used, see Publication 553.

Designated beneficiary. The individual named in the document creating the trust or custodial account to receive the benefit of the funds in the account is the designated beneficiary.

Eligible educational institution. An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the Department of Education. It includes virtually all accredited, public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. The educational institution should be able to tell you if it is an eligible educational institution.

Half-time student. A student is enrolled "at least half-time" if he or she is enrolled for at least half the full-time academic work load for the course of study the student is pursuing as determined under the standards of the school where the student is enrolled.