COVERDELL EDUCATION SAVINGS ACCOUNT FAQs

• What is better, a 401k or a Roth IRA?

  A Coverdell ESA account allows you and other family members to make post-tax, non-deductible contributions to benefit a child’s education. Contributions can be made until the child reaches age 18 and grow tax-free. They can be withdrawn tax-free to pay for a wide range of K-12 and higher education expenses but must be used by the time the beneficiary reaches age 30. 

• What are the rules for contributing to an ESA?

  You may contribute up to $2,000 a year, provided your modified adjusted gross income is under or equal to $95,000. If your income is over that limit, your contributions will be reduced by a certain amount depending on whether you're a single filer or are married filing jointly.

• When can I withdraw funds from an ESA IRA?

  You can make tax-free withdrawals to pay for qualified education expenses when your child is any age under 30. After age 30, you will likely need to pay penalties or taxes unless your child or beneficiary has special needs. Keep in mind you need to open the ESA IRA before your child reaches the age of 18.

• Do you pay taxes on a Coverdell ESA?

  No. An ESA IRA allows you or your child to make tax-free withdrawals to pay for qualified education expenses. Coverdell ESA funds also grow tax-free. This is because all contributions to the account are made from post-tax, earned income and are not tax deductible.  In other words, you and any contributing family members pay taxes now so that your child can enjoy tax-free withdrawals in the future! 

• What happens to a Coverdell if a child does not go to college?

  Coverdell funds can be used to pay for a wide range of qualifying K-12 and higher educational expenses even if your child does not attend a college, including other forms of higher education such as vocational training. If your child does not use Coverdell funds, then these can be transferred to another qualifying family member.

• What are the disadvantages of a Coverdell Education Savings Account?

  Coverdell ESAs are designed to provide a flexible and affordable way for families of all types to save for college. However, they do come with some disadvantages compared with other savings options:

  • There’s an annual contribution limit of $2,000 per beneficiary per year.
  • Individuals with high incomes may be ineligible to contribute. The income phase-out begins at $95,000 for single filers and $190,000 for joint filers.
  • Contributions can only be made until the beneficiary turns 18, and funds must be used by age 30, except in the case of certain special needs beneficiaries.
  • Many states offer tax incentives or matching programs for 529 plans, but Coverdell ESAs don’t qualify for these state benefits, meaning you could miss out on additional tax savings.

  For these reasons, it’s advisable to make use of both Coverdell and 529 accounts when planning for your child’s future education needs in order to gain the benefits of both savings options.

• Is a Coverdell worth it?

  A Coverdell ESA can be a smart way to save for future education expenses by allowing family members to work together to support the needs of a child or grandchild. While total contributions limits mean they may be of limited use to higher income earnings, they can provide a valuable and flexible source of funding for a wide range of educational costs from K-12 through to college or vocational training. 
  
  Coverdell ESAs offer all the tax advantages of a 529 savings account but also offer a wider choice of IRA investment options. And, while funds do need to be used by the time a beneficiary reaches 30 years of age, unused funds can be transferred to benefit another qualifying family member. 

• Where can you open a Coverdell education savings account?

  Coverdell education savings accounts can be opened at a wide range of financial institutions and brokerages. Wasatch Peaks Credit Union offers a wide range of Coverdell ESA IRAs, all with our trademark great rates and exceptional personal service.

• How does a Wasatch Peaks Credit Union Educational IRA Certificate work?

  All Wasatch Peaks Credit Union Certificates are available as IRAs, including the ESA IRA. Here's how it works:

  • You open your IRA and choose a Certificate term of 3 months to 60 months
  • You enjoy higher Certificate rates
  • You get the tax benefits of your chosen IRA (ESA, Roth, or Traditional)
  • You can withdraw funds when your Certificate term ends or reinvest in another Certificate IRA
    
    

• Do I need to join Wasatch Peaks Credit Union to open this account?

  Yes, you need to join the credit union, and becoming a member is easy! You simply need to meet these criteria:

  • You are an immediate family member of an existing member-owner, such as a parent, child, brother, sister, spouse, or surviving spouse.
  • You live, work, worship, or attend school in Weber, Morgan, or Davis Counties in Utah.