Coverdell ESA



Coverdell Education

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What is a Coverdell ESA (Education Savings Account)?

An investment tool created for the purpose of paying for the future cost of a child's education. The plan allows total after-tax contributions of $2,000.00 per year for each child until they reach the age of 18. These contributions and their subsequent earnings are tax-free when withdrawn to pay for qualified education expenses. A Share Savings or 18 month Share Certificate account specifically for the benefit of a person's education - usually a minor. Maximum contribution is $2,000.00 annually.

What is a Qualified Education Expense?

One that is required for the enrollment or attendance by your child at an eligible educational institution, including elementary, secondary or post-secondary institutions. These expenses include:

  • Tuition
  • Fees
  • Books
  • Supplies
  • Equipment
Who Can Contribute to an Education Savings Account?

The answer to that question is "almost anyone." There are two key limitations:

  • Each child can receive a total of $2,000 per year in contributions from all sources. It does not make a difference if this is done in a single account or multiple accounts designed to benefit the same child.
  • A person may be limited in the amount of their contribution if their modified adjusted gross income exceeds $95,000 for single filers or $190,000 for joint filers. Above these income levels, the ability to contribute is phased out. If income exceeds $110,000 for single filers, or $220,000 for joint filers, no contribution is allowed.

The ESA does not specify that the contributor must be a member of the family. With this broad range of potential contributors, it is possible that more than one person may want to contribute for the same child. A coordinated effort should be encouraged to avoid excess contributions.

Are contributions tax deductible?

No. Contributions to a Coverdell ESA are not tax deductible. However, they will grow tax-deferred until withdrawn for elementary, high school or college expenses. If used for qualified education expenses, they are withdrawn tax-free.

What is the deadline for opening and funding a Coverdell ESA?

April 15th is the deadline to open and fund a Coverdell ESA for any tax year.

Is there a penalty for a withdrawal from a Coverdell ESA that is not used for elementary, high school or higher education education expenses?

Any withdrawal (distribution) that is not used for qualified education expenses is taxed and is subject to a 10% penalty.

Can the Designated Beneficiary be Changed?

You may change the designated beneficiary (child). One example of why someone may wish to change the designated beneficiary is the current designated beneficiary has completed their education and there are funds remaining. The only stipulation is that the new designated beneficiary must be an eligible member of the family.

Eligible Members:

  • Children, grandchildren and stepchildren
  • Brothers, sisters, stepbrothers and stepsisters
  • Nephews and nieces
  • Parents, stepparents and grandparents
  • Uncles and aunts
  • Spouses of all the family members listed above
  • Cousins

It's important to remember that even with this extended range of family members, contributions can be made only for those under the age of 18, unless the beneficiary is a special needs beneficiary.

Find out how FedChoice can help you set up a Coverdell Education Savings Account.

Already a member? Opening your new Savings Account is easy.
Just visit the nearest Financial Service Center or call us at
301.699.6151 • 800.969.6151.
Click here to find a convenient Financial Service Center location.



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