College Savings: Coverdell Financial Aid Impact
When it comes to saving for college, there are many different opportunities available for families. In addition to understanding the different financial vehicles available for college savings, it’s important to know the impact they have on the college financial aid application process. Let’s take a look at on such college savings vehicle, the Coverdell.
College Financial Aid Impact: Coverdell
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What is a Coverdell Education Savings Account (ESA)?
A Coverdell Education Savings Account (ESA) is a type of investment account that allows parents, guardians, and other individuals to save for a child's education expenses. The account was named after Senator Paul Coverdell, who sponsored the legislation that created it in 1997.
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Coverdell Pros & Cons
One of the main benefits of a Coverdell ESA is that contributions to the account grow tax-free, and withdrawals are also tax-free if they are used for qualified education expenses. Qualified education expenses can include tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution.
Coverdell ESAs have contribution limits of $2,000 per beneficiary per year, and contributions are not tax-deductible. Additionally, individuals who contribute to a Coverdell ESA must have a modified adjusted gross income (MAGI) below a certain threshold to be eligible.
Another benefit of a Coverdell ESA is that the account can be used for a wide range of education expenses, including elementary, secondary, and post-secondary education expenses. This makes it a flexible tool for saving for a child's education.
However, it's important to note that Coverdell ESAs have some limitations. For example, the account must be used by the time the beneficiary turns 30, or the funds will be subject to taxes and penalties. Additionally, there are income limitations on who can contribute to a Coverdell ESA, which can make it difficult for high-income earners to take advantage of the account.
Overall, a Coverdell ESA can be a useful tool for individuals who want to save for a child's education expenses and take advantage of tax-free growth and withdrawals. However, it's important to carefully consider the account's limitations and eligibility requirements before making contributions.
Coverdell Financial Aid Impact
Similar to a 529 savings plan, the Coverdell will be considered as a parent asset. This means that it will have an impact on financial aid eligibility and be factored into a family’s expected contribution to college. However, it’s preferable for this to be a parent asset versus a student asset – like an UGMA or UTMA – which has a more significantly negative impact on the amount a family is expected to contribute to college.
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There is a lot to be gained from our free general financial aid advice, but it’s also a very individual process. If you have remaining financial aid questions, email us to discuss more or book an individual session.