Taxpayers may deposit up to $2,000 per year into a Coverdell Education Savings Account (ESA) for a child under age 18 or special needs beneficiary. Parents, grandparents, other family members, friends, and children themselves may contribute to the Coverdell ESA, provided that the total contributions during the taxable year do not exceed the $2,000 limit. Amounts deposited into the account grow tax-free until distributed, and the child will not owe tax on any withdrawal from the account if the child’s qualified higher education expenses at an eligible education institution for the year equal or exceed the amount of withdrawal. Eligible expenses also include elementary and secondary school (as determined by state law, K-12) costs and the cost of computer equipment, Internet services, and software. If the child does not need the money for post-secondary education, the account balance can be rolled over to the Coverdell ESA of certain family members who can use it for their education expenses, however the account must be fully withdrawn by the time the beneficiary reaches the age of 30, or taxes and penalties will apply. Amounts withdrawn from a Coverdell ESA that exceed the child's qualified education expenses in a taxable year are generally subject to income tax and to an additional tax of 10%.
If you are coordinating 529 Plan and ESA withdrawals and HOPE or Lifetime Learning credits, it is suggested you discuss your tax situation with a qualified tax advisor.